Quantitative measures:

• Quantitative measures are general measures that influence the overall economy i.e. measures that have an impact on the economy in general.
• They are not bifurcated based on sectors or segments in the economy. They have a common impact in all the sectors.

(A) Quantitative measures of bank control are discussed below:

1. Bank rate:

• Bank rate is the rate of interest which Reserve Bank of India charges on the loans and advances that it gives to the commercial banks for long term.
• At times, the commercial banks have shortage of funds and due to this reason, they borrow money which has to be repaid back with interest within the stipulated time period.
• If the bank rate is increased, commercial banks will borrow less money as it is expensive to borrow. Also, they will offer less amount of loan that too at higher rate of interest to their customers. The customers will then not be willing to take loans. Hence demand of goods and services will come down and inflation will be controlled.
• Thus, bank rate acts as a quantitative measure to control inflation in the economy.

2. Repo rate and reverse repo rate:

• RBI has stopped using bank rate as an instrument to regulate money supply. It now uses repo rate and reverse repo rate.
• When banks need money they approach RBI. The rate at which banks borrow money from the RBI by selling their surplus government securities to RBI is known as “Repo Rate.”
• Banks enter into an agreement with the RBI to repurchase the same pledged government securities at a future date at a pre-determined price.
• ‘Repo rate’ is short form of ‘Repurchase Rate’. Generally, these loans are for short durations up to 2 weeks. This means a bank may even take up loan for as low as 1 day.
• Thus, we can say that the Banks sell government securities to RBI in order to raise money for a very short term with a condition to repurchase them at some discount. Such a discounting rate is repurchase rate/repo rate.

Repo rate as a measure to control inflation:

• In case of inflation in the economy the RBI increases repo rate.
• Increasing repo rate discourages commercial banks to take loans as they would have to pay more interest to the RBI.
• Increase in repo rate forces commercial banks to increase interest rate of the loans it provides to the customer. Customers then borrow less money due to increased rates.
• This in turn reduces the purchasing power of the people thereby, reducing supply of money in the economy. Thus, increase in repo rate helps to curb inflation in the economy

Reverse repo rate:

• Reverse Repo rate is a short term borrowing rate at which RBI borrows money from commercial banks.
• Here, the RBI sells certain government securities to the commercial banks with an agreement of purchasing them back at a discounted rate at the end of short term period.
• RBI borrows money from commercial banks in two conditions:
  1. when they require additional funds and
  2. when they feel, there is too much money floating in the economy.
• Increase in reverse repo rate leads to increase in the incentives or interest that the commercial banks receive from RBI.
• Thus, the commercial banks will prefer giving loan to RBI instead of people. This will in turn reduce the supply of money in the market and thus, help in controlling inflation in the economy.
• It is a vice versa situation if the reverse repo rate is reduced i.e. it helps in controlling the deflation.

3. Stabilization under emergency situation:

• At times there might occur some emergency of acute shortage of cash with the commercial banks.
• Under such situations there is a special window for banks where RBI provides money to commercial banks against approved government securities.
• This rate is higher than repo rate and is known as ‘Marginal standing facility’. This helps in stabilizing inflation under emergency situation.

4. Cash Reserve Ratio (CRR):

• Under the RBI Act, 1934, all commercial banks have to keep certain minimum cash reserves with the RBI.
• Cash Reserve Ratio is the specified percentage of the total deposits of customers of the commercial bank that the bank has to maintain with the RBI.
• Initially CRR was decided to be 5% of demand deposits and 2% of term deposits.
• Since 1962, CRR is variable from 3% to 15% of the total deposits of individual banks.
• The main reason behind the cash reserves of commercial banks is to have enough liquidity in the market.
• The increase or decrease in the rate of CRR directly effects controlling inflation and deflation respectively.
• Higher CRR leads to more reserve with RBI..This lessens the total deposits of the commercial banks which forces them to provide less credit/loan to people.
• Due to less credit in the economy, people have less supply of money which in turn controls the inflation and increases economic stability.

5. Statutory Liquidity Ratio (SLR):

• Statutory Liquidity Ratio is the percentage of total deposits (25% or more) that the commercial banks have to maintain with RBI in form of cash, gold and government-approved securities.
• If the SLR is high, instead of banks giving loans and advances to customers, it will buy government securities.
• These government securities help RBI to fulfill the government expenses. A high SLR reduces the capacity of banks to give loans to customers thereby, reducing the supply of credit/money in the economy,
• A low SLR increases the capacity of banks to give loans thus increasing credit creation in the economy.

6. Open Market Operation (OMOs):

• When RBI purchases or sells government securities/bond in the open market it is called Open Market Operations (OMOs).
• When RBI purchases government bonds from the open market, the money supply in the economy increases thus controlling the effects of depression in the economy.
• When RBI sells government bonds in the open market, there is a decrease in money supply which controls the inflation in the economy.

7. Sterilization of RBI accounts against shocks arising from the excessive increase or decrease in amount of foreign exchange:

• Sterilization is a form of monetary action in which a central bank seeks to limit the effect of inflows and outflows of money supply in economy.
• When there is excess inflow of foreign exchange in India because of business activities, RBI sells government bonds in the open market so as to balance the amount of inflow of foreign exchange and vice versa.
• RBI does this to keep its balance sheet unchanged owing to excessive foreign exchange. Thus, it sterilizes its balance sheet against external shocks.