Quantitative or General Methods
(i) Bank rate policy: Bank rate is the rate
at which the central bank will rediscount bills of exchange or promissory notes
and grant loans on approved securities. Bank rate is also known as discount
rate. Sometimes, there may be more volume of credit in the economy. This will
lead to higher prices, higher wages and unusual economic activities. Then the
central bank may raise up the bank rate. With the rise in the bank rate, the
market rates will also go up. This will restrict new investment or expansion or
replacement. The ultimate result is that prices will fall due to reduction in
the volume of credit, employment and income.
The reverse will happen when bank rate is lowered.
(ii) Open market operations: Open market
operations refer to purchase and sale of securities by the central bank in the
open market on its own initiative. When commercial banks possess more reserves
for credit expansion purpose, the central bank will sell securities in the
market. The buyers will pay the central bank
with cheques drawn on their own banks. As a result the reserves of these banks
will fall, and this will reduce their credit operations. Similarly, when it
buys securities it will pay the sellers in cash or with cheques drawn on
itself. This will increase credit expansion capacity.
(iii) Variable reserve ratio: The central bank
can control volume of credit by varying cash reserve ratio whenever necessary.
If central bank raises the reserve ratio, it will lead to a reduction in the
supply of credit. Similarly, by an opposite process the supply of credit may be
expanded.
Qualitative
or Selective Methods
(i) Rationing of credit: Rationing of credit
means that central bank puts restrictions on accommodation for credit. The
credit is now rationed, and as such it will not be available as a general rule.
Here central bank limits the amount of credit for each applicant.
(ii) Direct action: Some of the commercial banks
conduct their activities against the instructions as laid down by the central
bank. Direct action means that central bank will penalize these banks by
charging penalty rates over and above the official discount rate.
(iii) Moral suasion: This refers to central bank's
policy of persuading the commercial banks to conduct their business in a
particular way.
(iv) Regulation of
consumer's credit: Consumer's credit is created through the purchase and sale
of consumer's durable goods like cars, TV. Etc. Their prices are repayable in
installments. The central bank may impose strict terms and conditions for
restricting this credit or liberalize terms and conditions for encouraging this
credit.
(v) Fixation of Margin requirements: The
central bank can also control the flow of credit by varying the 'margin' on
borrowing against certain types of securities which are offered by a particular
class of borrowers for taking loans.