Question : Which of the following measures can be adopted by the central bank to control credit in an economy?
Option 1: Changing the statutory liquidity ratio (SLR)
Option 2: Changing the cash reserve ratio (CRR)
Option 3: Changing the repo rate
Option 4: All of the above
Correct Answer: All of the above
Solution : The correct answer is (d) All of the above
The central bank, such as the Reserve Bank of India (RBI), has various tools at its disposal to control credit in an economy. These tools are used to regulate the availability of credit and manage the money supply to maintain price stability and promote economic growth. The measures mentioned in the options are as follows:
a). Changing the statutory liquidity ratio (SLR): The SLR is the percentage of a bank's net demand and time liabilities that it must maintain in the form of liquid assets like cash, gold, or approved securities. By increasing or decreasing the SLR, the central bank can influence the amount of funds available for lending by commercial banks.
b). Changing the cash reserve ratio (CRR): The CRR is the portion of a bank's deposits that it must maintain with the central bank in the form of reserves. By adjusting the CRR, the central bank can control the liquidity in the banking system. Increasing the CRR reduces the amount of funds available for lending by banks, while decreasing it increases the availability of funds.
c). Changing the repo rate: The repo rate is the rate at which the central bank lends money to commercial banks against collateral such as government securities. By changing the repo rate, the central bank can influence the cost of borrowing for banks. Increasing the repo rate makes borrowing more expensive, leading to a reduction in credit availability, while decreasing it makes borrowing cheaper, stimulating credit growth.
All of these measures, SLR, CRR, and repo rate, are important tools used by the central bank to control credit and regulate the overall money supply in an economy. The central bank adjusts these measures based on the prevailing economic conditions and policy objectives to achieve desired outcomes.
