Question

RBI can increase the bank credit component of money supply by _____________.

• A. lowering bank rate
• B. lowering CRR
• C. lowering SLR
• D. all of the above

Answer 1

Answer: (D)

all of the above

Reserve Bank of India is an apex bank that controls the entire banking system of India. It is the sole agency of note issuing and controls the supply of money in the economy. Reserve Bank of India(RBI) can increase the bank credit component of money supply by the following measures:

(i) Lowering the bank rate: Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. Bank rate is a quantitative credit control measure under the monetary policy of the government as it controls the overall supply of the money in the economy. Bank rate is reduced to increase the total money supply in the economy by increasing the amount of credit creation by the commercial banks.

(ii) Lowering CRR: Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must have to keep as reserves with the central bank in the form of cash. By decreasing the cash reserve ratio, the commercial banks has to maintain less cash with the central bank which increases their credit creation capacity and therefore money supply in the economy.

(iii) Lowering SLR: Statutory Liquidity Ratio (SLR) refers to liquid assets i.e. cash which the commercial banks must hold with themselves on a daily basis as a portion of their total deposits. By decreasing the statutory liquidity ratio, the commercial banks has to maintain less cash with themselves which increases their credit creation capacity and therefore money supply in the economy.