Question

Answer the following questions:

1. “Central Bank of the country has the monopoly of note issue.” Explain.
2. How does a Central Bank (for example RBI) transfer funds from one place to another? Illustrate.
3. Explain the Data Collection and Publicity functions of the Central Bank.
4. What are the various measures of quantitative credit control?
5. What are the various measures of qualitative credit control?

Answer 1

1. In India,
The Central Bank is the sole entity that can print currency notes. In other words, the central bank of a country has exclusive authority to issue currency. The currency issued by the central bank is known as 'legal tender money' i.e. the value of such currency is backed by the central bank. Since, issuance of notes is exclusively reserved for the central bank, it can be said that the
Central bank of a country has the monopoly over the issuance of notes.

2. Commercial banks have to mandatorily deposit a fixed percentage of their deposits with the Central Bank. The Central Bank uses this money to settle the claims of one bank by the other. In other words, the Central Bank undertakes transfer of funds from one bank to the other to settle inter-bank claims. In addition to this, the Central Bank also buys and sells securities on behalf of the government. By buying securities, it transfers money from the government’s account to the account of the security holders. Similarly, when it sells securities, it transfers money into the government’s account. Thus, in these ways, the Central Bank (RBI) transfers money from one place to the other.

3. The Central Bank collects a variety of data such as information about the agricultural, industrial and financial sectors, information about the exports and imports etc. It also publishes reports on the trends in the money and capital market, trends in the price levels etc. The information collected by the Central Bank is then used by the government to formulate its monetary and fiscal policies.

4. The following are the various measures of qualitative credit control:

i. Marginal Requirements - Margin requirement implies ascertaining the value of the loan that can be granted upon the mortgage of a certain security. The banks keep a margin, which is the difference between the market value of a security and its loan value. For example, a commercial bank grants loan of Rs 80,000 against security of Rs 1, 00,000. So, the margin is calculated as Rs 1, 00,000 – Rs 80,000 = Rs 20,000. When the central bank decides to restrict the flow of money, then the margin requirement of loan is raised. This is referred to as ‘Regulation of Margin Requirements’.

ii. Selective Credit Control (SCC’s) - An instrument of monetary policy that affects the flow of credit to particular sectors positively and negatively is known as selective credit control. The positive aspect is concerned with the increased flow of credit to the priority sectors. However, the negative aspect is concerned with measures to restrict credit to a particular sector.

iii. Moral Suasions - A persuasion technique followed by the central bank to pressurise the commercial banks to abide by the monetary policy is termed as moral suasion. This involves meetings, seminars, speeches and discussions, which explain the present economic scenario and thereby persuade the commercial banks to adapt the changes needed. In other words, this is an unofficial monetary policy that exercises the power of talk.