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Discuss about the bank rate and open market operations as instruments of credit control. |
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Answer» Bank Rate: The rate at which the central bank lends money to commercial banks is known as the bank rate. By changing the bank rate, the credit and thus the money supply can be affected. With an increase or decrease in the bank rate, the market rate of interest also increases or decreases. Thus with the increase in bank rate, credit becomes dearer and vice-versa. Obviously, when it becomes necessary to control the credit, then the bank rate is increased and when credit is to be expanded, the bank rate is decreased. Open Market Operation: By open market operations, we mean the sale and purchase of securities in the open market by the Central Bank of the country. If the Central Bank of the country wants to control credit, then it will start selling the securities lying with it. And when it is necessary to expand the credit, then the Central Bank starts purchasing securities from the open market. |
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