Money and Banking Test - 9

Bank rate is the rate at which central bank lends money to the commercial bank. If bank rate will increase, commercial banks will borrow less and so will have less liquidity to provide for loans. CRR is cash reserve ratio. When people deposit money in banks, the bank out of the total deposit keeps a % of the amount with the central bank. So if CRR will increase banks will have to keep a greater %of the total deposit with central bank and will thus have less money to provide loans. In this way the central bank can control money supply in the economy.

Central banks use contractionary monetary policy to reduce inflation. They reduce the money supply by restricting the amohttps://edurev.in/courses/10825_Cost-Accountingunt of money banks can lend. The banks charge a higher interest rate, making loans more expensive. Fewer businesses and individuals borrow, slowing growth.

A lender of last resort is an institution, usually a country 's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. In the United States, the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing and whose failure to obtain credit would dramatically affect the economy.

The quantitative measures of credit control are :
1. Bank Rate Policy: The bank rate is the Official interest rate at which RBI rediscounts the approved bills held by commercial banks. For controlling the credit, inflation and money supply, RBI will increase the Bank Rate. Current Bank Rate is 6%.
2. Open Market Operations: OMO The Open market Operations refer to direct sales and purchase of securities and bills in the open market by Reserve bank of India. The aim is to control volume of credit.
3. Cash Reserve Ratio: Cash reserve ratio refers to that portion of total deposits in commercial Bank which it has to keep with RBI as cash reserves. The current Cash reserve Ratio is 6%.
4. Statutory Liquidity Ratio: It refers to that portion of deposits with the banks which it has to keep with itself as liquid assets(Gold, approved govt. securities etc.) . the current SLR is 25%.
If RBI wishes to control credit and discourage credit it would increase CRR &SLR.

During open market situations the central bank sells the the securities which enables transfer of money from households to the central bank which reduces money supply in the economy and stabilizes the inflation

In addition to the mandatory amount of 4.5% of common equity tier 1 capital requirement set out in the capital requirements regulation (CRR), all banks are required to hold a capital conservation buffer and a counter cyclical capital buffer, to ensure that they accumulate a sufficient capital base in prosperous times to.