Quantitative/General Credit Control :
Under the General Credit Control, the instruments often employed by RBI are discussed below:
1. Bank Rate Policy
The Bank rate has been defined in Section 49 of RBI Act as “ the standard rate at which it (RBI) is prepared to buy or rediscount bills of exchange or other commercial paper eligible to purchase under this Act. By varying the rate, the RBI can to a certain extent regulate the commercial bank credit and the general credit situation of the country. The impact of this tool has not been very great because of the fact that RBI does not have a mechanism to control the unorganized sector.
2. Reserve Requirements
The Reserve Bank of India is vested with the powers to vary the CRR and SLR as explained above. By varying reserve requirements, the RBI restricts/frees the flow of funds by way of credit to different sectors of the economy. When SLR or CRR is increased by RBI, It reduces commercial banks’ capacity to create credit and thus helps to check inflationary pressures
3. Open Market Operations
Open market operations are a flexible instrument of credit control by means of which the Reserve Bank on its own initiative alters the liquidity position of the bank by dealing directly in the market instead of using its influence indirectly by varying the cost of credit. Open market operations can be carried out by purchases and sales, by Central Bank, of a variety of assets such as government securities (G-sec), commercial bills of exchange, Foreign exchange, gold and even company shares. In practice, however, RBI confines to the purchase and sale purchase of government securities including treasury bills. When the RBI purchases government securities from the banks, the latest deposits with it tend to increase adding to the cash reserves of banks and hence their capacity to expand credit increase. Conversely, when the RBI sells securities to the banks, their deposits with RBI would get reduced, contracting the credit base. The net result would be a contraction of credit and a reduction in money supply.
Repo Rate and Reverse Repo Rate:
Repos: The RBI introduced repurchase auctions (Repos) since December,1992 with regards to dated Central Government securities. When banking systems experiences liquidity shortages and the rate of interest is increasing, the RBI will purchase Government securities from Banks, payment is made to banks and it improves liquidity and expands credit.
Reverse Repos : Since November, 1996 RBI introduced Reverse Repos to sell Govt. securities through auction at fixed cut-off rates of interest. It provides short term avenues to banks to park their surplus funds, where there is considerable liquidity and call rate has a tendency to decline. These two rates are, now-a- days, commonly applied for reducing money supply or increasing it.
4. Moral Suasion
Moral Suasion indicates the advice and exhortations given by the Reserve Bank to the banks and other players in the financial system, with a view to regulate and control the flow of credit, generally, or to any one particular segment of the economy. This may be attempted through periodical discussions/communications. With a substantial share of banking business being in the public sector, this tool has proved effective.
5. Direct Action
This technique indicates the denial of the Reserve Bank to extend facilities to the banks which do not follow sound banking principles or where the Reserve Bank feels the capital structure of the bank is very weak. This is not attempted frequently but is used in rare cases involving continual and wilful violations of policies of the Reserve Bank/Govt. of India.