Control of Credit function - Central Banking, Indian Financial system Video Lecture | Indian Financial System - B Com

how central banker affect money supply
in the economy
let's meet mr. central banker and ask
him more about the tools that he uses to
control money supply in the economy
mainly I have a three tools to control
money supply and they are reserve
requirements open market operations and
discount rate reserve requirements it
influences how much money the banking
system can create with each dollar of
reserves and increase in reserve
requirements means that banks must hold
more reserves and therefore can loan out
less of each dollar that is deposited so
when I increase the reserve requirement
it decreases the money supply in the
economy conversely a decrease in reserve
requirements lawyers the reserve ratio
raises the money multiplier and
increases the money supply the second
tool that I use is open market
operations I conduct open market
operations when I buy or sell government
securities that is a g6 from the public
to increase the money supply I buy back
the government securities that are with
the banks the money I pay to the banks
for buying back the government
securities increases the total money
available with the banks and hence
increases the supply of money in
circulation for onward lending to reduce
the money supply
I do just the opposite I sell government
securities the financial system pays for
these government securities with its
holdings of currency and bank deposits
directly reducing the amount of money in
circulation in response banks reduce the
amount of
and the process of money creation
reverses itself the third tool that I
use is that discount rate the interest
rate on the loans that the central bank
makes to banks when the central bank
decreases discount rate banking system
borrow more from central bank and the
banking system has more money than it
had before and this additional money can
be lent onwards so decreased discount
rate increases money supply in the
economy the central bank can alter the
money supply by changing the discount
rate when the central bank increases
discount rate it discourages banks from
borrowing from the central bank
so they borrow less and banking system
have less money than it had before does
an increase in the discount rate reduces
the quantity of reserves in the banking
system