Question

Central bank controls credit through

• A. bank rate
• B. open market operations
• C. CRR
• D. all of these

Hint:

The Central Bank's main credit control tools are: changing the interest rate for banks (Bank Rate), buying/selling bonds (OMO), and changing the reserve requirement (CRR).

Answer 1

The Correct Option is D

The central bank uses several tools, known as instruments of monetary policy, to control the supply of credit in the economy. The options listed are the main quantitative (or general) tools:

(A) Bank Rate: The interest rate at which the central bank lends money to commercial banks. A higher bank rate makes borrowing expensive for commercial banks, reducing their lending capacity and thus controlling credit.
(B) Open Market Operations (OMO): The buying and selling of government securities in the open market. Selling securities soaks up liquidity from the system, while buying securities injects liquidity, thereby controlling credit.
(C) Cash Reserve Ratio (CRR): The fraction of total deposits that commercial banks are legally required to hold as reserves with the central bank. Increasing the CRR leaves banks with less money to lend, thus contracting credit.
All these are standard tools for credit control.