Measures to check inflation would include steps to control the growth of demand and increase agricultural and industrial supply so that balance between demand and supply is maintained. Government has made efforts to overcome inflationary situation and bring about price stability. The various measures are:
8.6.1 Monetary Measures or Restricted Availability of Credit
The Reserve Bank of India (RBI) is like the main bank of the country. It has the power to control how much money is created and used in the economy. When there’s too much demand for things, the RBI uses different tools to make it a bit harder for people to get loans. This means borrowing money becomes more expensive. The tools the RBI uses are divided into three parts, like shown in the chart.
| Monetary Measures to Control Inflation | |
| 1. Quantitative Instruments | 2. Qualitative Instruments |
| (a) Raise Bank Rate | – Raise Marginal |
| (b) Open Market Operations | Requirement |
| – Greater selling eligible securities | – Moral Suasion |
| to commercial banks | – Rationing of Credit |
| (c) Variable Reserve Ratio | – Direct Action |
| (i) Raise Cash Reserve Ratio (CRR)(ii) Raise Statutory Liquidity Ratio (SLR) | |
Quantitative instruments are general tools that affect the overall amount of money in the whole country. Qualitative instruments are selective tools that influence the amount of money in specific areas or control where the money goes.
Quantitative Instruments:
- Bank Rate Policy: This is like the interest rate that the RBI charges when it lends money to banks. When there’s too much demand for things, the RBI raises this rate, making it more expensive for people to borrow money. This discourages borrowing and reduces the overall amount of money in the economy. In times of low demand, the RBI lowers this rate.
- Open Market Operations: The RBI buys and sells certain securities to and from banks. When there’s excess demand, the RBI sells these securities to banks, blocking their cash and reducing their ability to lend money. This helps limit the availability of credit. In a slow economy, the RBI buys these securities.
- Variable Reserve Ratio:
- Cash Reserve Ratio (CRR): This is the portion of total deposits that banks must keep in cash with the RBI. To control excess demand, the RBI increases the CRR, leaving less cash for banks to lend. In a slow economy, the RBI lowers the CRR.
- Statutory Liquidity Ratio (SLR): This is the portion of total deposits that banks must keep as liquid assets. To manage excess demand, the RBI raises the SLR, reducing the surplus cash that banks can use for loans. In a slow economy, the RBI lowers the SLR.
Qualitative Instruments:
These tools limit credit for specific sectors only. The main method to address excess demand is:
- Marginal Requirement: This is the difference between the value of security and the borrowed amount. The RBI can set different requirements for different uses, diverting credit to essential sectors. In times of excess demand, the RBI increases this requirement, meaning borrowers get less credit against their securities, restraining the volume of credit.
- Moral Suasion: During inflation, the RBI encourages banks to control credit and provide loans for essential purposes, not speculative ones. It’s a way to limit the availability of credit during times of excess demand.
Objective Type Questions
1.What is the main purpose of measures to check inflation, as mentioned in the passage?
a) Increase demand and reduce supply
b) Control the growth of demand and increase supply
c) Encourage borrowing and lending
d) Limit the availability of credit
Answer: b) Control the growth of demand and increase supply
2.Who has the power to control how much money is created and used in the economy, according to the passage?
a) Government
b) Banks
c) Reserve Bank of India (RBI)
d) Industrial sectors
Answer: c) Reserve Bank of India (RBI)
3.What happens when there’s too much demand for things, and the RBI raises the Bank Rate Policy?
a) Borrowing money becomes cheaper
b) Borrowing money becomes more expensive
c) The RBI encourages borrowing
d) The overall amount of money in the economy increases
Answer: b) Borrowing money becomes more expensive
4.What is the purpose of Open Market Operations during times of excess demand, as mentioned in the passage?
a) Increase the overall amount of money in the economy
b) Block cash and reduce the ability of banks to lend money
c) Encourage borrowing
d) Lower the Bank Rate
Answer: b) Block cash and reduce the ability of banks to lend money
5.What is Cash Reserve Ratio (CRR), and how does it relate to controlling excess demand?
a) It is the interest rate that the RBI charges banks. Increasing CRR limits cash available for loans.
b) It is the portion of total deposits that banks must keep in cash with the RBI. Increasing CRR limits cash available for loans.
c) It is the value of securities that banks must keep with the RBI. Increasing CRR encourages borrowing.
d) It is the portion of total deposits that banks must keep as liquid assets. Increasing CRR encourages borrowing.
Answer: b) It is the portion of total deposits that banks must keep in cash with the RBI. Increasing CRR limits cash available for loans.
6.What does the Statutory Liquidity Ratio (SLR) determine, and how does it relate to managing excess demand?
a) It determines the interest rate for bank loans. Increasing SLR reduces surplus cash for loans.
b) It determines the portion of total deposits that banks must keep as liquid assets. Increasing SLR reduces surplus cash for loans.
c) It determines the value of securities banks must keep with the RBI. Increasing SLR encourages borrowing.
d) It determines the portion of total deposits that banks must keep in cash with the RBI. Increasing SLR limits cash for loans.
Answer: b) It determines the portion of total deposits that banks must keep as liquid assets. Increasing SLR reduces surplus cash for loans.
7.What does Marginal Requirement measure, and how does it relate to controlling credit during inflation?
a) It measures the difference between the value of security and the borrowed amount. Increasing Marginal Requirement encourages borrowing.
b) It measures the overall credit available in the economy. Increasing Marginal Requirement restrains the volume of credit.
c) It measures the interest rate for bank loans. Increasing Marginal Requirement reduces surplus cash.
d) It measures the demand for loans. Increasing Marginal Requirement increases the overall amount of money in the economy.
Answer: b) It measures the overall credit available in the economy. Increasing Marginal Requirement restrains the volume of credit.
8.What is Moral Suasion, and how is it used during inflation?
a) It is the difference between the value of security and the borrowed amount. Increasing Moral Suasion encourages borrowing.
b) It is the overall credit available in the economy. Increasing Moral Suasion restrains the volume of credit.
c) It is a measure of demand for loans. Increasing Moral Suasion reduces surplus cash.
d) It is a way to encourage banks to control credit and provide loans for essential purposes during times of excess demand.
Answer: d) It is a way to encourage banks to control credit and provide loans for essential purposes during times of excess demand.
9.What is the primary purpose of Monetary Policy or Monetary Measures to control inflation?
a) Increase overall demand in the economy
b) Control the growth of demand and increase supply
c) Encourage borrowing and lending
d) Lower the Reserve Bank of India (RBI) interest rates
Answer: b) Control the growth of demand and increase supply
10.Which instrument of Monetary Measures aims to control excess demand by influencing the interest rate at which the RBI lends money to banks?
a) Open Market Operations
b) Cash Reserve Ratio (CRR)
c) Bank Rate Policy
d) Moral Suasion
Answer: c) Bank Rate Policy