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1. ROLE OF RBI IN CREDIT CONTROL BY- ASHMIT GUPTA
STUDENT AT ST.JOSEPH’S

2. MONEY SUPPLY IN INDIA
The money supply refers to the total sum of money available to the
public in the economy at a point of time. It is a stock concept in
sharp contrast to the national income which is a flow representing
the value of goods and services produced per unit of time, usually
taken as a year. It always refers to the amount of money held by
the public. In the term public are included households, firms and
institutions other than banks and the government. The rationale
behind considering it as held by the public is to separate the
producers of money from those who use money to fulfill their
various types of demand for money.

3. CONCEPT OF MONEY SUPPLY
1. Currency with the Public:
In order to arrive at the total currency with the public in India we add the following
items:
Currency notes in circulation issued by the Reserve Bank of India.
The number of rupee notes and coins in circulation.
Small coins in circulation.
2. Demand Deposits with the Public:
Demand deposits in the banks are those deposits which can be withdrawn by
drawing cheques on them. Through cheques these deposits can be transferred to
others for making payments from which goods and services have been purchased.

4. MEASURES OF MONEY SUPPLY
Several definitions of money supply have been given and therefore various
measures of money supply based on them have been estimated.
Narrow Money M1:
This is the narrow measure of money supply and is composed of the following items:
Ml = C + DD + OD
Where, C = Currency with the public
DD = Demand deposits with the public in the commercial and cooperative banks.
OD = other deposits held by the public with Reserve Bank of India.

5. OTHER MEASURES OF MONEY SUPPLY
M2 = M1 + Saving Deposits with Post Office Saving Banks
M3 = M1 + Time Deposits with Bank
M4 = M3 + Total Deposits with Post Office Savings Organisation

6. WHO SUPPLIES MONEY ?
Suppliers of money include –
➢ Central Bank of the country
➢ Commercial Banks
➢ The Government
In India, RBI is the principle supplier of money. RBI issues currency on the basis of
minimum reserve system. Under this system , Reserve Bank maintains a minimum
reserve of ₹ 200 crores in the form of gold and foreign securities.
Commercial banks are the second significant source of money supply. The
commercial banks cannot issue notes and coins. Yet, they are the supplier of money
as they create money by way of demand deposits. Money created by the way of
demand deposits by commercial bank is called bank money.
Government is the third source of money supply in the country. In India, Ministry of
finance issues one rupee notes and coins of all denomination.

7. RESERVE BANK OF INDIA
The Reserve Bank of India is the Central Bank of India, which means
it is at the apex of the banking structure of the economy. It is one of
the main governing body and regulatory body in India and helps
the government in its role as a business facilitator.
HISTORY
The RBI was first established on the 1st of April 1935 and
nationalized in 1949. The governing of the RBI is done in accord to
the RBI Act by the government. Its day to day affairs are take care
of the Board of Directors who are chosen by the government.

8. FUNCTIONS OF
RBI
Principle functions of the central
bank are as under –
1. Bank of Issuing Notes
The main function of the central bank is
to print currency notes and RBI has the
sole right in the country for this
operation. RBI prints money of all
denominations apart from 1 rupee note.
It is the ministry of finance that issues 1
rupee note.

9. 2. Banker and Advisor to the government
This role of central bank is of a fiscal agent
to the government where the RBI keeps the
deposits of both central and state
governments. It also makes payments on
behalf of the government, along with
buying and selling foreign currencies. The
various functions of a reserve bank as an
advisor is to tender useful suggestions to the
government regarding monetary policies
and other economic matters
3. Custodian and manager of foreign
exchange reserves - To keep the rates of
foreign exchange stable, the reserve bank
buys and sells foreign currencies at
international prices. If the supply of foreign
currency decreases in the economy, RBI sells
them at foreign exchanges, and in case of
surplus supply, it buys them. RBI is also an
official reservoir of foreign currencies and
gold. RBI sells gold to monetary authorities
of other countries at fixed prices

10. 4. Bankers’ Bank and Supervisory
Role -As a bankers’ bank, it has
almost the same relation with other
banks in the country as a
commercial bank has with its
customers.
5. Lender of the last resort - The
RBI grants accommodation to
commercial banks, financial
institutions, bill brokers, etc. in the
form of collateral advances or re-
discounts. This step is taken in times
of stress so that the financial
structure of the country is saved
from collapsing. This lending is
done on the basis of government
securities, treasury bills, government
bonds, etc.

11. 6. Control of Credit – The principal
function of central bank is to control the
supply of credit in the economy. It
implies increase or decrease in the
money supply in the economy by
regulating the credit creation by the
commercial banks. The central banks
need to control the supply of money to
cope with the situations of inflation and
deflation. During inflation, money
supply is reduced and during deflation,
money supply is increased.
The central adopt various measures to
control the supply of money in the
economy. Largely these measures
relate to credit supply by the
commercial banks. These are broadly
classified as –
(a) Quantitative Measures
(b) Qualitative Measures

12. QUANTITATIVE
MEASURES
1. Bank rate – Bank rate is the rate at which
the Central bank lends money to the
commercial banks for their liquidity
requirements. Bank rate is also called
discount rate. In other word’s bank rate is
the rate at which the central bank
rediscounts eligible papers (like approved
securities, bills of exchange, commercial
papers etc) held by commercial banks.
2. Open Market Operations - It refers to
buying and selling of government
securities in open market in order to
expand or contract the amount of money
in the banking system. This technique is
superior to bank rate policy. Purchases
inject money into the banking system while
sale of securities do the opposite. During
last two decades the RBI has been
undertaking switch operations.

13. QUANTITATIVE
MEASURES
1. 3. CRR -The Cash Reserve Ratio (CRR)
is an effective instrument of credit
control. Under the RBl Act of, l934
every commercial bank has to keep
certain minimum cash reserves with
RBI. The RBI is empowered to vary
the CRR between 3% and 15%. A
high CRR reduces the cash for lending
and a low CRR increases the cash for
lending.
2. 4. SLR - Under SLR, the government
has imposed an obligation on the
banks to; maintain a certain ratio to
its total deposits with RBI in the form
of liquid assets like cash, gold and
other securities.

14. QUANTITATIVE
MEASURES
1. 5. Repo and Reverse Repo Rate - In
determining interest rate trends, the
repo and reverse repo rates are
becoming important. Repo means Sale
and Repurchase Agreement. Repo is a
swap deal involving the immediate Sale
of Securities and simultaneous purchase
of those securities at a future date, at a
predetermined price. Repo rate helps
commercial banks to acquire funds from
RBI by selling securities and also
agreeing to repurchase at a later date.
2. Reverse repo rate is the rate that banks
get from RBI for parking their short
term excess funds with RBI. Repo and
reverse repo operations are used by
RBI in its Liquidity Adjustment Facility.
RBI contracts credit by increasing the
repo and reverse repo rates and by
decreasing them it expands credit

15. QUALITATIVE
MEASURES
1. 1. Margin Requirements - A
loan is sanctioned against
Collateral Security. Margin
means that proportion of the
value of security against which
loan is not given. Margin
against a particular security is
reduced or increased in order
to encourage or to discourage
the flow of credit to a
particular sector. It varies from
20% to 80%. For agricultural
commodities it is as high as
75%. Higher the margin lesser
will be the loan sanctioned.

16. QUALITATIVE
MEASURES
1. 2. Moral Suasion - Under Moral
Suasion, RBI issues periodical
letters to bank to exercise control
over credit in general or
advances against particular
commodities. Periodic discussions
are held with authorities of
commercial banks in this respect.
2. 3. Rationing of Credit – Rationing
of credit refers to fixation of
credit quotas for different
business activities. The RBI fixes
credit quota for different
business activities.
3.