ICSE Class 10 Answered

Three monetary policies of the Reserve Bank of India to control credit are:

1. Bank Rate Policy

Bank rate policy is used as the main instrument of monetary control during inflation. When the central bank raises the bank rate, it is said to have adopted a dear money policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets reduced. Therefore, inflation arising due to bank credit is controlled.

2. Cash Reserve Ratio

While controlling inflation, the central bank raises the CRR which reduces the lending capacity of the commercial banks. Consequently, the flow of money from commercial banks to the public decreases. In the process, it halts the rise in prices arising due to bank credits to the public.

3. Open market operations

Open market operations refer to the sale and purchase of government securities and bonds by the central bank. While controlling inflation, the central bank sells government securities to the public through the banks. This results in the transfer of a part of bank deposits to the central bank account and reduces credit creation capacity of the commercial banks.