MODULE –II(Answer key)

Business cycles- Phases of a business cycle. Economic systems- Capitalist, Socialist, Mixed economy.
Inflation: Definition, Courses of inflation, Control of inflation. Banking: Functions of Central Banks, Functions of
Commercial Banks. Monetary Policy, Fiscal Policy.

2 Marks (A Part)

1. List out the uses of Business cycle. (May 2019)

 Demand forecasting
 Inventory Management
 Pricing decisions
 Business Expansion
 Marketing decisions
2. What is monetary policy / credit control? (May 2019)
Monetary policy refers to credit control mechanisms by the central bank of a country. Credit control is a
mechanism through which the central bank exercises control over the total money circulation in the
country.
3. What do you mean by fiscal policy/ budgetary policy? (May 2019, August 2022, April 2024)
Fiscal policy refers to the policy of the government as regards taxation, government borrowing and
government expenditure with specific objectives in view. These objectives are to produce desirable effects
and avoid undesirable effects on the national income, production, employment and general price level.
Fiscal policy is also called budgetary policy.
4. RBI acts as a Lender of last resort. Comment.( March 2020, April 2024)
 It keeps reserves of commercial banks.
 It serves as lender of last resort by meeting the immediate cash requirements of commercial banks.
5. What is OMO? (March 2020)
OMO refers to sale and purchase of government securities and debts by the central bank to and from the
public. The securities can be bills and bonds of government, or any other public securities or trade bills.
6. Give the meaning of recovery phase of Business cycle. (March 2021)
This phase is also called revival. At this stage the economic activities starts picking up. As there is high rate of
unemployment in the economy, labourers are now willing to work at low wages, banks with excess liquidity come
forward to lend at liberal rates and slowly the general feeling of pessimism disappears and gives way to optimism.
7. Mention the causes of Business cycle. (2 Marks -March 2021, May 2023, April 2024)
(a) Increase in demand for goods and services
(b) Decrease in supply of goods and services.
8. What do you mean by SLR? (March 2021)
SLR means Statutory Liquidity Ratio. SLR refers to cash in hand, gold, central and state government securities,
balances in the current account with Reserve Bank, State Bank and its subsidiaries as certain percentage of
demand and time liabilities.
9. What do you mean by scheduled banks? (October 2021)
Banks, which are included in the second schedule of the RBI Act, are known as scheduled banks. Scheduled
commercial banks can be public sector banks and private sector banks. Indian public sector banks consist of
State Bank group and other nationalised banks.
10. Write a note on recession. ( August 2022, May 2023)
 Symptoms of recession appear once the economy reaches the peak of boom. There is fall in demand at this
stage and it will take some time for producers to be fully aware about the decline in demand of their
products.
11. Define inflation. (August 2022, May 2023)
Inflation is described as a situation of rising prices which cause a decline in the purchasing power of money.
Prof. Crowther has defined inflation "as a state in which the value of money is falling, i.e., prices are rising".

5 Marks (B Part)

1. Write a short note on the phase of depression.(May 2019, March 2020)

a) Decline in production: There is decline in the production of goods and services and therefore there is
idle plant capacity for most of the manufacturing industries. Capital goods industries are more affected
than consumer goods industries.
b) Increase in rate of unemployment : The rate of unemployment in the economy increases as a result of
decline in production.
c) Low income and profit: High rate of unemployment leads to low income and less demand for goods
and services .The profit of business firms are at its lowest during depression.
d) Low price level : The fall in demand is more rapid than the fall in production leading to accumulation
of inventories. The prices of agricultural commodities and raw materials fall more rapidly of than the
prices of finished goods. All these lead to a fall in the price indices.
e) Less demand for bank credit: Due to this entrepreneurs are declined to make further investments and
the less efficient and loss making firms close down their business venture. The bottom of depression
period is called trough.

2. What are the features of capitalism? ( May 2019)

"Capitalism is an economic system characterised by private ownership of the factors of production, market
allocation of resources and the use of economic incentives".
Features
1. Right of private property: Right of private property means that productive factor such as land, factories,
machineries etc. are owned by private individuals. It means that by using the factor inputs they will
produce only those goods and services that people want and will offer them at prices higher than the cost
of production.
2. Market allocation of resources: Market allocation of resources is the use of relative prices to determine
what, how and for whom to produce. Since capitalism permits right of private property, an owner of
private property has the right to use the property to his best advantage and to sell the goods and services
at the best price possible.
3. Use of economic incentives: A capitalist system makes use of economic incentives to motivate workers,
managers, and entrepreneurs to carry out their economic tasks. Higher salaries, bonuses etc. are economic
'incentives to employees and entrepreneurs are rewarded by profits.
4. Freedom of choice by consumers: In a capitalist economy every consumer enjoys the freedom to choose
the commodities and services they want to consume. This is known as consumer sovereignty.
5. Profit motive: It is the profit motive which forces people to work and produce. Under capitalism
producers produce only those commodities and services which are expected to yield maximum profit.
 6. Competition: Competition prevails among sellers in selling as many commodities as possible through
advertisement and other promotional activities, among buyers to obtain goods to satisfy their wants by
offering higher prices, among workers as well for jobs.

3. Briefly explain the functions of RBI. (May 2019)

Reserve Bank of India is the central bank of India. They are summarized below.
1. Issuing Currency Notes: The RBI has the monopoly of issuing currency notes in India, except one rupee
notes and coins which are issued by the Ministry of Finance, Government of India. RBI issues and
distributes currencies through its two major department’s viz., issue department and banking department.
2. Banker to the Government: RBI acts as a banker to both the central government and state governments.
a) It maintains and operates the deposit account of the central and state governments.
b) It receives and makes payment on behalf of the central and governments.
3. Banker's Bank: Being the apex financial institution in the country, RBI controls regulates the activities of
all scheduled commercial banks in India.
a) It keeps reserves of commercial banks.
4. Control and management of foreign exchange: RBI is entrusted with the task of controlling and
managing of count foreign exchange reserves and to maintain the external value of Indian rupees.
5. Credit control: RBI controls the availability of credit in the Indian economy. It is the commercial banks
that make the credit available in the economy.
6. Collection of data and their publications: RBI collects statistical data and economic information through
its department of economic analysis and policy. This department conducts research and reviews financial
and banking conditions in the country
7. Other development and promotional functions:
a) Providing training facilities to banking personnel at different levels through various training institutions
set up by RBI.
b) RBI channelizes credit to priority sectors like agriculture, small scale industries, exports etc.
4. Write out the advantage and disadvantage of socialism. (March 2020)
List out any two merits of socialism (2 marks- October 2021)
Merits of socialism

a) Inequalities of income are reduced to the minimum and the system ensures social justice.
b) The allocation resources under socialism is much better and rational because the central authority is in a
better position to assess the basic needs of the society.
c) Socialism adopts economic planning and it ensures rapid economic growth.
d) A socialist society makes the fullest use of productive resources by eliminating all wastes of competition.
e) Socialism provides social security to the people through various social welfare schemes such as free
education, health care, old age pensions, social insurance covering unemployment, accidents, sickness etc.
Demerits of socialism

a) Socialism leads to inefficient bureaucratic running of the government machinery and red tapism.
b) The critics of socialism argue that the state alone cannot find adequate amount of capital which are
necessary for the running of all industries.
c) Consumers are not given the opportunity to maximise satisfaction because there is no consumer
sovereignty under socialism. Consumption will have to adjust itself to production in a socialistic set up but in a
capitalistic set up production will have to adjust itself to consumption.
 d) There is no motivation for hard work as socialism relies more heavily on moral incentives rather than
economic incentives.
e) There is no freedom of enterprise and as such there is loss of economic freedom.
f) The state is supreme and the importance of the role of individual is minimum.
5. Describe the fiscal measures to control inflation. ( March 2020)
Fiscal measures aim at controlling inflation due to increase in aggregate demand caused by increase in
government expenditure and reduction in tax rates - both direct and indirect. The most effective measure is
to cut down government expenditure. A cut in government expenditure reduces government demand and
private consumption on goods and services because the income of the public falls as there is a cut in the
expenditure on public utility services like construction of roads, bridges, dams etc.
If increase in aggregate demand is caused by private expenditure, the expenditure by the households and
firms, taxation of income is the most appropriate measure to control inflation. If there is an increase in tax
rate, the disposable income declines and aggregate demand decreases.
6. Explain primary functions of a commercial bank. (March 2021)
Primary Functions

Accepting Deposits- The most important function of Lending Money-Second important function if a bank
bank is to accept deposits from the public. Through is to advance loans to the public. Bank lend money
this function banks pool together the savings and in the following ways:
used for the productive purposes. Different types of a. Overdraft- Current account holder is
deposits: permitted by the bank to draw more than
a. Fixed deposit- Deposited for a fixed period the amount standing to his credit.
of time. b. Cash Credit-Extending advances to
b. Current deposit- Money can deposit any individuals and organizations against bonds,
number of times. inventories, and other types of securities.
c. Savings deposit- Any amount of money at c. Discount bills of exchange-Bill discounting is
any number of times. considered a profitable investment for
d. Recurring deposit- Depositors a fixed sum of banks.
money every month for an agreed period. d. Money at call and at short notice.
e. Term loans

7. What are the objectives of fiscal policy? ( March 2021)

Mention any two objectives of the fiscal policy. (2 Marks-March 2020)
1) Achievement of full employment: Full employment means full time job for people who want to work
time. An increase in government expenditure and/or decrease in taxes income would lead to increase in
disposable income. Since consumption a function of income an increase in disposable income will increase
aggregate demand. An increase in aggregate demand leads to increase in production and employment
level.
2) Economic stability: Economic stability means absence of trade cycles, that is, booms and depressions.
During times of boom, the appropriate fiscal policy response would be to decrease government
expenditure and/or to increase tax rates so that the disposable income available for spending decreases
and the aggregate demand falls. On the contrary, during times of depression, the appropriate fiscal policy
response would be to increase government expenditure and/or to reduce tax rates so that the disposable
income increases and the aggregate demand rise.
3) Reducing inequalities of income: It is through fiscal policies inequalities of income and wealth is
reduced. Through progressive taxation government collects more taxes from the rich and spends the same
 for various welfare programmes such as medical care for poor, free education to poor children, free
housing to poor etc.
4) Reducing unemployment and underemployment: In a developing economy, a large number of rural
people remain unemployed during off-seasons. During such situations government can undertake public
works programmes to provide employment to the rural people.
5) Control of inflation: Aggregate demand is reduced by making a cut in government expenditure and/or
an increase in tax rates.
8. Write a short note on the uses of business cycle. (October 2021, August 2022)
a)Demand forecasting: Demand for products varies at different phases of business cycle. During recovery
and boom periods firms may expect high demand for their products. If the economy is slipping into
recession and depression firms may expect a fall in the demand of their products.
b) Inventory Management: A proper knowledge about business cycle helps business firms to decide or the
level of their inventory holdings. If a boom is anticipated on the part of business firms to hold more
inventories so that they can sell them at higher prices as soon as the opportunity comes. If the economy is
at a recession phase it may move into depression or later and therefore a decision to hold less inventories
may be taken to avoid loss due to fall in prices.
c) Pricing decisions: Helps decision makers to decide an appropriate price for their new products. If the
economy is operating in a phase of boom it is profitable for firms to decide a high price for their products. If
the economy is operating in a phase of depression a decision to charge a lower price.
d) Business expansion: Business firms may decide on expanding their activities recovers from a state of
depression. It is the apt time to decide on expanding production capacity and product diversification. Thus
business cycle enables decision makers to take timely and profitable business decisions.
e) Marketing decisions: Business firms earn more profit during boom periods. This will help them to
maintain the demand of their products even in times of business adversities.
9. Describe secondary function of a commercial bank. (August 2022)
Secondary Functions

Agency Services General Utility Services

a. Transfer of funds- Transferring funds from a. Locker facility- Customers keep their
one place to another through cheques, valuable and important document for safe
drafts. custody.
b. Collection of cheques- Behalf of customer, b. Issue of traveller’s cheques- Facilitate their
banks accept cheques, bills and promissory customers to travel without the fear of theft
notes for collection. or loss of money.
c. Execution of standing orders [Link] of letter of Credit
d. Purchase & Sale of securities d. Collection & dissemination of Information
[Link] of dividend on shares e. Under writing securities
[Link] tax consultancy f. Dealing in foregin exchange
[Link] as trustee, executor g. Acting as referee
h. Issue of ATM cards

10. What are the objectives of monetary policy? (August 2022)

[Link] stability: Credit control is to maintain price stability advances in the country by controlling the
volume of credit. Inflation is a situation of rising prices and deflation is a situation of fall in prices and
money incomes of factors of production.
2. To achieve stability of foreign exchanges: A stable rate of foreign exchange can be achieved only by
increasing or decreasing the volume of credit in the country.
 3. Elimination of business cycle: The ups and downs in the economic activity can only be controlled by the
credit policy of the central bank.

4. Economic growth: Economic growth of a country can only be achieved through the credit policy of the
central bank by promoting savings, mobilization of resources and encouraging the requirements of
different sectors of the economy the basis of plan priorities.

11. Discuss the features of mixed economy. (May 2023)

1) Co-existence of private and public sectors: In a mixed economy both private and public sector co-exist a
mixed economy. In the private sector, production and distribution managed and controlled by private
individuals but they are regulated by government. Industries in the sector are not profit oriented but are
welfare oriented.
2) Existence of dual system of pricing: In the private sector, prices of goods, services and factors of
production are determined through the market forces of demand and supply. But in the public sector, the
state determines the prices of various products. For example, in India, the prices of essential commodities
like diesel, LPG are fixed by the government.
3) Mixed economy is a planned economy: Public enterprises have to work according to the plan laid do
central authority.
4) Regulation of private sector: Though there are private sectors in a mixed economy, they are not allowed
to operate exclusively in the interest of the private entrepreneurs .Government ensures that they also
function in the interest of the nation introducing license system under which government approval is
required for setting up a factory.
5) Balanced regional development: A mixed economy can ensure balanced regional development by
establishing public sector enterprises in the backward regions to ensure its development.

11. What do you mean by monopoly of note issue of a central bank? ( May 2023)
The RBI has the monopoly of issuing currency notes in India, except one rupee notes and coins which are
issued by the Ministry of Finance, Government of India. RBI issues and distributes currencies through its
two major department’s viz., issue department and banking department. The issue department is
entrusted with the task of proper and efficient management of the note issue. The Banking department of
RBI manages seasonal fluctuations in currency circulation. Whenever currency circulation declines the
banking department transfers eligible securities to the issue department, on the basis of which the issue
department issues more currency notes.
12. Briefly explain the instrument of monetary policy. (May 2023)
The credit control mechanism of central bank is divided into two methods
(1) Quantitative or general credit controls -Quantitative credit control aims at regulating the volume of
bank advances i.e., to make the banks lend more or less. The following are the quantitative methods of
credit controls.
a. Bank Rate Policy
b. Open Market Operations
c. Variable Reserve Ratio
d. Variations in SLR
(2) Qualitative or selective credit control-Qualitative credit controls aim at regulating the uses of credit in
order to diversify credit towards more essential productive uses. It also aims at channelizing the flow of
bank credit from unproductive and speculative purpose to productive and socially useful purpose.
a. Fixation of margin requirements
 b. Regulation of consumer credit
c. Moral suasion
d. Direct action

13. Enumerate the features of business cycle. (April 2024)

 Wave like movement
 Repetitive in nature
 All- embracing
 Reflected in aggregate economic variables like production, income, employment and prices.
 Upward & downward movement
 All pervading impact.

15 Marks (C Part)

1. Describe the causes and control of Inflation. (15 marks- May 2019)
Mention the various causes of inflation. (5 Marks- March 2021, April 2024)
Economists have identified the main cause of inflation as the emergence of excess demand for goods and
services in a country. The excess demand may arise on account of two factors (a) increase in demand for
goods and services (b) decrease in supply of goods and services.

Factors responsible for increase in demand

a) Increase in both private and public expenditure. This will give rise to more employment opportunities
and more purchasing power.
(b)Reduction in tax rates increases purchasing power of people.
(c) Increase in purchasing power due to repayment of past debts by the government to the public.
(d) An increase in population results in more demand.
(e) Liberal monetary policies lead to availability of bank credit at cheaper rates of interest.

Factors responsible for decrease in supply

(a) Excessive exports will lead to shortage of goods and services in the domestic market.
(b) Shortage of supplies of factors of production will give rise to decline in the production of goods and
services.
(c) Occurrence of natural calamities like floods, droughts etc. adversely affect the supply of agricultural
products and raw materials.
(d) Hoarding by traders in anticipation of further rise in prices.

2. Explain the concept of mixed economy. State your opinion in favour and against mixed economy. (March
2021)

The characteristics of both capitalism and socialism are present in a mixed *economy. It is neither pure capitalism
nor pure socialism but a mixture of the two. A mixed economy is operated both by private and public enterprises. A
mixed economy appreciates the advantages of private enterprise with their emphasis on self- interest and profit
motive. At the same time it recognises the importance of public sector to promote the interests of the society as a
whole.
 Advantages

Economic stability: Economic activities are planned systematically, which can lead to economic stability.

Consumer sovereignty: Goods are produced based on consumer preferences.

Private sector encouragement: A mixed economy encourages the private sector.

Social welfare: A mixed economy prioritizes social welfare through economic and planning.

Efficiency: Competition between the public and private sectors can maintain a high level of efficiency.

Disadvantages

Government control: A mixed economy can lean more toward government control and less toward individual
freedoms.

Taxation: The government decides the amount of tax on products, which can lead to high taxes and unwillingness
to pay them.

Shortages: Lack of price control management can lead to shortages in goods and a recession.

Undue influence: Private enterprises may seek to lobby the government to influence legislation or activities to
benefit themselves.

Moral hazards: Private enterprises may take more risks because they know they are too big to fail.

2. Explain the objectives and various methods of fiscal policy. (October 2021)
Fiscal policy refers to the policy of the government as regards taxation, government borrowing and government
expenditure with specific objectives in view. These objectives are to produce desirable effects and avoid undesirable
effects on the national income, production, employment and general price level. Fiscal policy is also called budgetary
policy.
Objectives of fiscal policy

The main objectives of fiscal policy are summarised under the following points.
1) Achievement of full employment: Full employment means full time job for people who want to work time. An
increase in government expenditure and/or decrease in taxes income would lead to increase in disposable income.
Since consumption a function of income an increase in disposable income will increase aggregate demand. An
increase in aggregate demand leads to increase in production and employment level.
2) Economic stability: Economic stability means absence of trade cycles, that is, booms and depressions. During boom,
the appropriate fiscal policy response would be to decrease government expenditure and/or to increase tax rates so
that the disposable income available for spending decreases and the aggregate demand falls. During depression, the
appropriate fiscal policy response would be to increase government expenditure and/or to reduce tax rates so that
the disposable income increases and the aggregate demand rise.
3) Reducing inequalities of income: It is through fiscal policies inequalities of income and wealth is reduced. Through
progressive taxation government collects more taxes from the rich and spends the same for various welfare
programmes such as medical care for poor, free education to poor children, free housing to poor etc.
4) Reducing unemployment and underemployment: In a developing economy, a large number of rural people remain
unemployed and/or underemployed during off-seasons. During such situations government can undertake public
works programmes to provide employment to the rural people.

5) Control of inflation: During times of inflation, fiscal policy is an important measure used to control inflation.
Aggregate demand is reduced by making a cut in government expenditure and/or an increase in tax rates.

Instruments of fiscal policy:

1) Taxation: Tax is an important source of revenue to the government. It is through taxes, government finds its
resources for public spending. There are two types of taxes direct and indirect taxes. Direct taxes include personal
income tax, (tax paid by individuals) corporate income tax, (tax paid by companies) and tax on property and wealth.
Indirect or commodity taxes include sales tax, excise duty and customs duties (import and export duties).
2) Public expenditure: Public expenditure or government expenditure means the sum of expenditure of the
government on purchase of goods and services, investment in public sector and transfer payments such as payment
of pensions, subsidies unemployment allowances, grants and aids etc. An increase in government expenditure
creates more employment opportunities and more income and increase in aggregate demand.
3) Deficit financing: When the government spends more than its expected revenue, it is following a deficit budget
policy. Such an excess of government expenditure is financed either by drawing down the cash balances of the
government held with the central bank or state treasures or by borrowing from the central bank. Such a method of
financing the excess government expenditure is called deficit financing. Deficit financing leads to a net increase in
money supply with the public.
4) Public borrowings: Public borrowings include internal and external borrowings by the government. Internal
borrowings can be either borrowings from the public through government bonds and treasury bills or borrowings
from the central bank. External borrowings can be in the form of borrowings from foreign governments, borrowings
from international organisations like World Bank and IMF and market borrowings.

4. Explain the functions of Central Bank. (August 2022, May 2023)

Reserve Bank of India is the central bank of India. They are summarized below.
[Link] Currency Notes: The RBI has the monopoly of issuing currency notes in India, except one rupee notes and
coins which are issued by the Ministry of Finance, Government of India. RBI issues and distributes currencies
through its two major department’s viz., issue department and banking department. The issue department is
entrusted with the task of proper and efficient management of the note issue. The Banking department of RBI
manages seasonal fluctuations in currency circulation. Whenever currency circulation declines the banking
department transfers eligible securities to the issue department, on the basis of which the issue department issues
more currency notes.
2. Banker to the Government: RBI acts as a banker to both the central government and state governments. As a
banker to the government it provides the following Services;
a) It maintains and operates the deposit account of the central and state governments.
b) It receives and makes payment on behalf of the central and governments.
c) It manages public debt and the issue of new loans and treasury bill the central government.
d) It advances money to the central government in times of emergency Loans and advances given by RBI to central
government for short per is called Ways and Means Advances (WMA).
e) It provides fund remittance facilities to central and state government.
f) It acts as an advisor to the government on all financial matte formulation of five year plans, resource mobilization
etc.
g) It represents government of India as a member of IMF and World B (IBRD).
3. Banker's Bank: Being the apex financial institution in the country, RBI controls C regulates the activities of all
scheduled commercial banks in India. In following areas RBI acts as banker's bank.
a) It keeps reserves of commercial banks.
b) It serves as lender of last resort by meeting the immediate cash requirements of commercial banks.
c) It provides clearance and remittance facilities to commercial banks centres where it has offices or branches.
d) It rediscounts the eligible bills of commercial banks during the period of their financial stringency.
4. Control and management of foreign exchange: RBI is entrusted with the task of controlling and managing of
count foreign exchange reserves and to maintain the external value of Indian rupees. It is the RBI that controls the
receipts and payments of foreign currencies
5. Credit control: RBI controls the availability of credit in the Indian economy. It is the commercial banks that make
the credit available in the economy. Since the commercial banks are controlled by RBI, it is easy to exercise control
over the volume of credit available in the economy by controlling the activities of commercial banks.
6. Collection of data and their publications: RBI collects statistical data and economic information through its
department of economic analysis and policy. This department conducts research and reviews financial and banking
conditions in the country. It compiles data on economic matters like money, finance, credit, industrial production,
prices etc.
7. Other development and promotional functions:
a) Providing training facilities to banking personnel at different levels through various training institutions set up by
RBI.
b) RBI channelizes credit to priority sectors like agriculture, small scale industries, exports etc.
c) It makes institutional arrangement for rural and industrial finance by setting up various cells and institutions
under its control.
d) It assists the government in economic planning and takes suitable step to improve the working of Indian money
market.
e) RBI appoints committees, from time to time, to enquire into the problem of money and banking and to suggest
measures to resolve them.

5. Discuss the various instruments of monetary policy. (April 2024)

Monetary policy refers to credit control mechanisms by the central bank of a country. Credit control is a
mechanism through which the central bank exercises control over the total money circulation in the country. The
credit control mechanism of central bank is divided into two methods

(1)Quantitative or general credit controls -Quantitative credit control aims at regulating the volume of bank
advances i.e., to make the banks lend more or less. The following are the quantitative methods of credit controls.

a. Bank Rate Policy: Bank is the rate of interest on loans and advances given to commercial banks the central bank.
Since, Central bank is the lender of last resort to commerce banks; central bank can influence the volume of bank
credit available in a country. Bank rate is the rate of interest charged by the Central Bank whiles the rate of interest
charged by financial institutions in the money market.
The underlying principle of the BRP is that changes in bank rate results in changes in the money market rates,
making credit costlier or cheaper and affecting it's demand and supply. When the central bank feels that there is
excess credit in the country, it raises the bank rate. This causes a spurt in the market rate, which will discourage
business activity, and the demand for credit falls. This will result into shrinking of bank credit available in the
country. When the central bank feels that there is lower volume of credit in the country, it cuts the bank rate so
that the business activity in the country flourishes which causes an expansion of the volume of credit.
b. Open Market Operations: Open Market Operation means purchase and sale by a central bank of any kind of
securities and bills. The securities can be bills and bonds of government, or any other public securities or trade bills.
OMO is a deliberate attempt by the central bank to influence the volume of credit available in the country. The
underlying principle of the OMO is that the sale of securities by the central bank leads to contraction and purchase
to credit expansion.
c. Variable Reserve Ratio: Every commercial bank is required to keep a certain percentage of its deposits as
reserves with the central bank known as cash reserve. Cash reserve ratio (CRR) is the ratio of reserves kept with the
central bank in proportion to the total deposits of a commercial bank. When the central bank feels that there is
excess credit in the country, it will increase the CRR. When the CRR is increased, all the commercial banks in the
country have to keep more cash with the central bank.
d. Variations in SLR: SLR means Statutory Liquidity Ratio. Every bank is required to maintain a certain percentage of
their demand and time liabilities as SLR. SLR refers to cash in hand, gold, central and state government securities,
balances in the current account with Reserve Bank, State Bank and its subsidiaries as certain percentage of demand
and time liabilities. RBI is empowered to fix the SLR.
(2)Qualitative or selective credit control-Qualitative credit controls aim at regulating the uses of credit in order to
diversify credit towards more essential productive uses. It also aims at channelizing the flow of bank credit from
unproductive and speculative purpose to productive and socially useful purpose.

a. Fixation of margin requirements: Margin is the difference between the market value of a security and the
amount of loan granted by commercial banks against a security. In other words, margin is that percentage of the
value of a security that cannot be borrowed by a customer. The central bank has the power to fix the margin to be
kept by the commercial banks on their loans.
b. Regulation of consumer credit: Regulation of consumer credit means maintaining economic stability by
regulating the demand for consumer durable goods. Under this method, credit is controlled by laying down rules
regarding minimum down payment and the duration of loans. If the central bank finds depression in a particular
sector of the economy, it reduces the down payment and extends the maturity period of loans. If it finds boom, it
hikes the down payment and lowers the maturity period.
c. Moral suasion: Under moral suasion, the central bank as a leader, persuades or requests the entire commercial
banks to co-operate with the general monetary policy of the central bank. Moral suasion may take many forms. The
central bank may request the commercial bank not to approach the former for any financial assistance or not to
finance any speculative or unproductive activities and the like.
d. Direct action: Direct action is resorted to by the central bank when the commercial banks do not follow its
instructions and directives. Under direct action, the central bank may refuse to rediscount the bills of erring
commercial banks.

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