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Instruments of Monetary control - Central Banking, Indian Financial system Video Lecture | Indian Financial System - B Com

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FAQs on Instruments of Monetary control - Central Banking, Indian Financial system Video Lecture - Indian Financial System - B Com

1. What is the role of central banking in the Indian financial system?
Ans. Central banking plays a crucial role in the Indian financial system. The Reserve Bank of India (RBI) acts as the central bank and is responsible for formulating and implementing monetary policies, issuing currency, regulating and supervising banks, managing the foreign exchange reserves, and ensuring financial stability in the country.
2. What are the instruments of monetary control used by the central bank in India?
Ans. The central bank in India uses various instruments of monetary control to manage the money supply and achieve its monetary policy objectives. These instruments include open market operations, reserve requirements, bank rate policy, repo rate, reverse repo rate, and statutory liquidity ratio.
3. How does open market operations help in controlling the money supply in India?
Ans. Open market operations refer to the buying and selling of government securities by the central bank in the open market. When the central bank purchases government securities, it injects money into the economy, thereby increasing the money supply. Conversely, when it sells government securities, it absorbs money from the economy, reducing the money supply. By conducting open market operations, the central bank can influence the liquidity conditions in the banking system and control the money supply.
4. What is the role of reserve requirements in regulating the Indian financial system?
Ans. Reserve requirements refer to the amount of funds that banks are required to keep as reserves with the central bank. By adjusting the reserve requirements, the central bank can influence the liquidity position of banks and control the money supply. If the reserve requirement is increased, banks have to keep a higher proportion of their deposits as reserves, reducing the funds available for lending and thereby controlling the money supply. Conversely, if the reserve requirement is decreased, banks have more funds available for lending, leading to an increase in the money supply.
5. How does the central bank use the bank rate policy to control the Indian financial system?
Ans. The bank rate policy refers to the rate at which the central bank lends to commercial banks. By increasing the bank rate, the central bank makes borrowing from it more expensive for commercial banks. This, in turn, increases the cost of borrowing for individuals and businesses, discouraging borrowing and reducing the money supply. Conversely, by decreasing the bank rate, the central bank encourages borrowing and stimulates economic activity, leading to an increase in the money supply. The central bank uses the bank rate policy as a tool to control inflation and promote economic growth.
39 videos|39 docs|14 tests
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