Quantitative Method of Credit Control: Bank Rate

The Reserve Bank of India (RBI) uses different methods to control credit in the economy. These methods are known as credit control measures. There are two types of credit control measures: Quantitative and Qualitative. Quantitative measures are the ones that involve the use of money as a tool to control credit. Bank Rate is one such quantitative measure.

Bank Rate: Meaning and Significance

Bank Rate is the rate at which the RBI lends money to commercial banks. When the RBI increases the Bank Rate, it becomes expensive for commercial banks to borrow money from the RBI. As a result, the commercial banks increase their lending rates, which makes borrowing expensive for the customers. This leads to a decrease in the demand for credit, which helps in controlling inflation.

On the other hand, when the RBI decreases the Bank Rate, it becomes cheaper for commercial banks to borrow money from the RBI. As a result, the commercial banks decrease their lending rates, which makes borrowing cheaper for the customers. This leads to an increase in the demand for credit, which helps in boosting the economy.

Bank Rate vs. Other Credit Control Measures

Moral Suasion and Margin Requirement are the other two credit control measures used by the RBI. While Bank Rate is a quantitative measure, Moral Suasion and Margin Requirement are qualitative measures. Moral Suasion is the persuasive technique used by the RBI to influence the commercial banks to lend or not to lend money. Margin Requirement is the minimum percentage of cash or securities that the borrowers have to keep with the banks against the loan amount.

Conclusion

In conclusion, Bank Rate is a quantitative method of credit control used by the RBI. It involves changing the rate at which the RBI lends money to commercial banks to control credit in the economy. While Moral Suasion and Margin Requirement are qualitative measures used by the RBI, Bank Rate is a quantitative measure.