Quantitative Method

(i)  Bank Rate Policy: The bank rate is the rate of interest at which the Central Bank lends money to the commercial banks in emergency. The effect of a change in the bank rate is to change the cost borrowings from the Central bank.

- An increase in the bank rate increase the cost of borrowings from the Central Bank. Therefore, if the Central Bank increases the bank rate, the commercial banks also increase the rates at which they lend to the public and business firms. It makes borrowings by the people costly. This will discourage them to take loans. People borrow less. Thus, volume of credit and money supply will decrease in the economy.

- A decrease in the bank rate will have the opposite effect, i.e., money supply will increase

(ii) Open Market Operations (OMO) : It is the buying and selling of government securities in the open market by the Central Bank.

- When the Central bank buys securities, it makes payments to the sellers who deposit the same in commercial banks. It increases the cash reserves of the banks and thus directly increase banks ability to give credit. So, money supply increases.

- When to Central Bank sells securities, the buyers make payment with the commercial banks decrease since money flows out of the commercial banks and into the Central Bank. This reduced bank’s ability to give credit. So, money supply in the economy decrease.

(2)  Quantitative Method

(i)  Margin Requirement : The difference between the value of security and the amount of loan sanctioned is known as margin requirement. By changing the margin requirement Central bank can increase or decrease the credit creation in desired directions. If Central bank wants to increase the credit in a particular use then it will decrease the margin requirement for that use.

(ii)  Consumer Credit : Loans given by commercial banks to the consumers to purchase the durable consumer goods, are known-as consumer’s credit. Central bank can make the loans attractive or unattractive by following way :-

(a)  By changing the minimum down payments, 

(b) By changing the maximum period of repayment. (installment)