Indian Banking System is one of the most important topic for economics. Questions from this section are made on points like Functions of RBI, Establishment of RBI, Quantitative and Qualitative Measures and their rates. Here we are going to discuss Quantitative and Qualitative Measures of RBI. If you have missed our previous post on RBI & Its Functions, Kindly visit the post to read the complete content on Reserve Bank of India.
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Quantitative Measures
- Bank Rate:
- Current Bank Rate is 6.50%
- Bank Rate is the Rate of Interest at which the RBI provides assistance to commercial banks.
- When RBI raises Bank Rate, it is called 'Dear Money Policy'. Generally done during a period of Inflation.
- When RBI lower's Bank Rate, it is called 'Cheap Money Policy'. It is done during a period of Recession.
- Cash Reserve Ratio(CRR):
- Current Cash Reserve Ratio is 4%.
- It is that Ratio of total deposit of a bank which it has to necessarily keep with the central bank of a country at any given point of time.
- This ratio generally may be raised at the time of inflation and lowered at the time of recession.
- Statutory Liquidity Ratio (SLR):
- Current SLR(Statutory Liquidity Ratio) is 19.5%.
- SLR is the ratio of total deposit of the bank that has to be kept with the bank in the form of liquid funds. such as Cash in Hands, Govt Securities.
- Open Market Operations(OMO):
- Operations conducted by the Central Bank of any country under which it buys government securities from commercial Bank or Sell securities to Commercial Banks.
- Repo Rate:
- Current Rate is 6.25%.
- also known as Repurchase Rate.
- Exercised by RBI since 1992.
- According to which, RBI buys govt securities from banks repos are essentially short-term operations conducted to manage the supply and demand of liquidity in a short period.
- Thus Repo means the injection of Liquidity by the RBI.
- Reverse Repo Rate:
- Current Repo Rate is 6.25%.
- Also known as Reverse Repo Operation.
- Started by RBI since 1996.
- It implies that it is banks which lend to the RBI by buying securities from RBI for a short Period with a promise to sell them back to the RBI on a specified date at a certain price.
Qualitative Measures
- Rationing of credit:
- According to this method, the RBI directs banks to give credits to the specified list of priority sectors defined by RBI. Eg. agriculture, small-scale industries, poverty alleviation, etc.
- Regulation of Credit for Consumption purpose:
- By the use of this measure RBI direct banks to restrict credit for the purchase of consumer durables like fridge, TV, etc. and instead give more credit for a Productive purpose.
- Variation of margin requirements:
- According to this measure RBI time and again asks banks to vary (lower or raise) margins on loans given by the banks for sensitive commodities eg: When a person required to take a loan to buy a truck then bank will give 85% loan & ask 15% for paying on his own.(Down Payment).
- Moral Control:
- When banks refrain from obeying RBI regulations, the RBI applies moral pressure or advice from time to time to restrain from doing it and when the banks do not obey, it allows the public to know about it.
- Direct Action:
- Charge penalty interest rate
- Moratorium for few months
- Cancel the license of the bank
- Stop lending
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