every country there is one bank which acts
as the leader of the money market,
supervising, controlling and regulating the
activities of commercial banks and other
to the statutes of Bank of
International Settlements, “the bank of the
country to which has been entrusted the
duty of regulating the volume of currency
and credit in that country”
of Note Issue
Custodian of Foreign Exchange Reserve
Banker to the Government
Public Debt functions
Advisor to the Govt on economic reforms
to the Banks
Controller of Credit
Promoter of Economic Development
of cash reserves
of last resort
means the regulation of the creation and
contraction of credit in the economy.
of Credit control
Stability of Internal Price-level
Checking Booms and Depressions
Promotion of Economic Development
Stability of the Money Market
Stability in Exchange Rates
controls are designed to
regulate the volume of credit created by the
banking system. These measures work
through influencing the demand and supply
measures, on the other hand,
are designed to regulate the flow of credit in
Quantitative Methods Qualitative or
Bank Rate Policy
Issue of directives
Restriction of purpose
Rate of interest
rate refers to the official minimum lending
rate of interest of the central bank.
It is the rate at which the central bank advances
loans to the commercial banks by rediscounting
the approved first class bills of exchange of the
Hence, bank rate is also called as the discount
of Bank Rate- affects the supply of
of Bank Rate
Process of Bank Rate Influence
for Bank Rate
market operations refer to the
purchase and sale of securities by the central
In its broader sense, the term includes the
purchase and sale of both government and
But, in its narrow connotation, open market
operations embrace the purchase and sale of
government securities only
of Open Market Operations
of Open Market Operations
To eliminate the effects of exports and imports
to gold under the gold standard.
To impose a check on the export of capital.
To remove the shortage of money in the money
To make bank rate more effective.
To prevent a „run on the bank‟.
Maintenance of a Definite Cash Reserve Ratio
Non-operation of Extraneous Factors
Non-existence of Direct Access of Commercial
Banks to the Central Bank
Reserve Ratio refers to the
percentage of the deposits of the
commercial banks to be maintained with the
central bank, being subject to variations by
the central bank.
other words, altering the reserve
requirements of the commercial banks is
called variable reserve ratio.
The theory underlying the mechanism of variable
reserve ratio is that by varying the reserve
requirements of the banks, the central bank is in a
position to influence the size of credit multiplier
of the banks and therefore the supply of credit in
of Variable Reserve Ratio
essential and nonessential uses of bank
Only non-essential uses
are brought under the
scope of central bank
Affect not only the
lenders but also the
Features of Selective
Divert the flow of credit
Regulate a particular sector of
Regulate the supply of
Stabilise the prices of inflation
Stabilise the value of
Correct an unfavourable BoP
Bring under the control of the
Exercise control upon the
lending operations of the
Regulation of Consumer Credit
They limited the amount of credit that might be
granted for the purchase of any article listed in
the regulations; and
They limited the time that might be agreed upon
for repaying the obligation
Fixes a limit upon its rediscounting facilities for any
Fixes the quota of every affiliated bank for financial
accommodation from the central bank.
With direct power of controlling bank advances
either by statute or by mutual consent between
the central bank and commercial banks.
The selective controls embrace the commercial banks
only and hence the nonbanking financial institutions are
not covered by these controls.
It is very difficult to control the ultimate use of credit by
It is rather difficult to draw a line of distinction between
the productive and unproductive uses of credit.
It is quite possible that the banks themselves through
manipulations advance loans for unproductive purposes.
Selective controls do not have much scope under a
system of unit banking.
Development of alternative methods of business
financing has reduced the importance of selective
Quantitative or general methods or instruments.
Open Market Operations
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Qualitative or selective methods or instruments.
Variation of Margin Requirements
Credit Authorization Scheme (CAS) & Credit
Monitoring Arrangement (CAM)
Control of Bank Advances
Differential Interest Rates
Credit Squeeze Policy
main objective of monetary policy pursued by
the Reserve Bank of India is that of „controlled
Objectives of Monetary policy are:
Expansion in the supply of money, and
As incomes grow the demand for money as one of the
components of savings tends to increase.
Increase in money supply is also necessitated by gradual
reduction of non-monetised sector of the economy.
Restraint on the secondary expansion of credit.
While exercising restraints, care should be taken that
the legitimate requirements of agriculture, industry and
trade are not adversely affected
changes in the Monetary Policy of RBI
past 3 months.
of the RBI‟s monetary policy on the
of the Monetary policy on the
performance of the Banks