Quantitative credit control instruments

Quantitative credit control instruments:

Quantitative credit control instruments comprise bank rate policy, disparity of cash reserve ratios and open market operations.

1. Bank Rate:

The Bank rate is the lowest rate at which the central bank of a country will lend money to every other bank. Assume that, there is too much of money in circulation. Then the central bank must take little money out of circulation. It can do it by raising the bank rate. Whenever the bank rate mounts up, the rates charged by other banks mount up. The belief is that when the rate of interest mounts up, businessmen will be discouraged to borrow much money and producers will borrow less money for investment. Usually, to control inflation, the central bank will raise the bank rate.

2. Variation of cash Reserve Ratios:

The capability of a commercial bank to generate credit based on its cash reserves. The central bank of a country has the power to differ the cash reserve ratios. During inflation, to ensure the sharp rise in commodity prices and to control credit, the central bank can make utilization of this weapon.

3. Open Market Operations:

The open market operations have been conducted in Central Government securities and State Government securities. The accomplishment of open market operations as a weapon of credit control mainly based on:

(i) The control through the central bank of sufficient volume of securities;
(ii) The existence of well developed bill (i.e., securities) market; and
(iii) Stability of cash reserve ratios sustained by commercial banks.

Such things are missing to a great extent. Therefore, open market operations have not become a powerful weapon of credit control in any country. They have been mainly employed and more to assist the Government in its borrowing operations instead of controlling the credit.

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