[G]Monetary Control

INTRODUCTION: 1.Monetary Control is the main function of the Reserve Bank ,as it is central bank of the country.

2.Formulating and administering monetary policy involves using of instruments within its control to influence the level of aggregate demand for goods and services by regulation of the total money supply and credit. 3.The RBI exercises monetary regulation by influencing the availability and cost of credit by exercising different types of controls. 4.General or quantitative controls are the instruments of Bank rate,reserve requirements and open market operations.These methods affect the total money supply.

Bank Rate

Bank Rate is defined in Section.49 of the RBI Act as the standard rate at which the Bank is prepared to buy or re- discount bills of exchange or other commercial paper eligible for purchase under the Act . In India Bank rate has been changed frequently to effect change in the cost of funds available from Central Bank to banks and financial institutions.

The effectiveness of Bank Rate

The effectiveness of Bank Rate as an instrument of monetary control depends on the extent of operation in the money market and also on how far the commercial banks resort to borrowing from Reserve Bank.

Open Market Operations [OMO].

Section17(8) of the RBI Act authorizes the Reserve Bank to engage in the purchase and sale of securities of any maturity of the Central Governments and State Governments. OMO can be carried out by purchase and sale of a variety of assets such as Government securities ,commercial bills of exchange ,foreign exchange,gold and even company shares. In actual practice they are confined to buying and selling of Government securities.When securities are purchased from the open market ,the reserves of the banks with Reserve Bank increases and they can accordingly expand credit.

Cash Reserve

Section 42 of RBI Act & Section 18 of Banking Regulation Act,1949 deal with cash reserves to be kept with the Reserve Bank by scheduled banks and non-scheduled banks respectively. Scheduled banks have to maintain an average daily balance of 5% of the total demand and time liabilities in India of such banks.Further RBI is empowered to raise up to 20% of total demand and time liabilities.

Statutory Liquidity Ratio(SLR)

Banks are required under section [24(1)of RBI Act,1949] to maintain in India liquid assets in cash ,gold or unencumbered approved securities amounting to 25% of its total demand and time liabilities. RBI is empowered to raise up to 40%.

Interest Rate

Reserve Bank exercises direct control over the lending rate of banks by influencing cost of bank credit by increase or decrease in the lending rates rather than the Bank rate. RBI is empowered to issue direction to banks in public interest or in the interest of banking policy.

Selective Credit Control

Selective Credit Control refers to regulation of distribution or direction of bank resources to certain sectors of the economy.This is done in terms of broad national policies for achieving developmental goals.

Selective credit control is exercised by RBI by stipulating

a)minimum margins for lending against selected commodities (b)ceilings on the levels of credit, and (c) rates of interested commodities. The first two control quantum of credit and the

last,the cost of credit.

Indian Financial System

Reserve Bank of India