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Unit 14: Financial Regulations

10. The objective of credit control is …………………………of prices without inflation and Notes
deflation by adjusting credit creation to the needs of the economy.

14.3.4 Instruments of Credit Control

The operation of credit control is through various instruments of policy. These instruments are
classified in to quantitative or general controls and qualitative or selective controls.
Quantitative or general controls are:
1. Bank rate policy.
2. Open market operations.
3. Variable cash reserve requirements and liquidity requirements.
4. Quantitative credit limits and other direct credit controls.

Selective controls are:
1. Variation in margin requirements.
2. Consumer's credit control and control on quantum of flow of funds to stock and commodity
markets.

Notes Selective credit controls are controls on consumer credit or credit flowing in to the
various sectors of the economy or for various purposes and against various securities or
commodities.

Other Controls

In addition to general and selective controls, Central Banks also use direct controls, moral
suasion and others to influence the credit by banks and other financial institutions and to make
them follow certain policies or priorities in lending.

Monetary Policy and Economic Variables

In broad terms, monetary policy should also aim at a desirable level of monetary growth. In
India, the existence of unorganized and subsistence sectors and a vast parallel economy
necessitates a constant adjustment of the monetary policy to the changing economic scenario.

Besides it is generally assumed in any discussion or monetary budget and in monetary policy
that the velocity of circulation of money remains constant. But in India with frequent shifts of
public preferences from cash to deposit money and vice versa and as between black economy
and organized economy, there are frequent fluctuations in the velocity of money.

Bank Rate and Interest Rates

Bank rate is the standard rate of discount charged by the Central Bank of the country to eligible
parties. It is the minimum official rate at which the Central Bank rediscounts first class bills of
exchange from the discount houses and commercial banks. By bank rate policy, we mean the
terms and conditions under which the money market can have temporary access to the Central
Bank in the form of discounts and rediscounts or secured advances. This policy would influence
both the cost and availability of credit. The cost is the interest rate of commercial banks and
market rate of interest, both of which are influenced by changes in the bank rate. The availability

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