Reserve Bank of India is the central of India has the monopoly of issue of notes. Notes are printed by RBI issued except one rupee coin and subsidiary of that coin.
How RBI functions:click here
Now the question can be raised that, why not RBI can print more notes and destribute to people free so that everybody get rich?
RBI prints notes according to availibility of gold reserves. Not according to need if RBI prints then leads to inflation.
How inflation occurs actually
If RBI print note and distribute to public, Then the purchasing power of people increases, demand increases, due to demand the price of goods increases which leads to inflation. Inflation decrease the value of Rupee
For example :let us assume that you deposite 10lakh Rupees in bank, if the inflation rate increase to 7% then the your value of deposits will be 93 lakh, although you get the 10lakh but if you wish to purchase some goods you can purchase only 93 lakh rupees value of goods because the price of that goods increases by 7%.
Inflation may also rises due to more credit given by commercial bank,I bank gives more money to public then their purchasing power increase,demanf increase,price increase, I price increases then inflation. Inflation is like our devil it off our savings in future the value of Rupee decrease,
To control the credit in market RBI has some tools, if people have no money then they can't purchase the goods
credit is created by commercial bank by
providing Discount on Bill, loans and advances (credit). It also
has some limitations as follows
1. Circulation of money determines the
creation of credit
2. Bank cannot create credit without acquiring securities
3. Amount
public desired to hold determines the
creation of credit
4. Creation of credit are limited by
policies of RBI
5.Bank had
to keep some cash reserve cannot create
credit
exceed
6. Credit creation depend upon nature of business ,
during prosperity it is high and low
during depression.
Before discussing control of credit let us understand some terms
1. Repo rate :It the rate
where RBI lends money to commercial Bank
which have shortage of funds
2. Reserve repo rate : It is
the rate where RBI borrows money from bank. Bank keep money with RBI which
earns higher returns
3. Cash reserve ratio It is
the percentage of total deposit where bank shall maintain with RBI
4. Statutory liquidity ratio
It is proportion of deposit that bank are required to maintain in liquid form
Control of
credit
The
most important function of RBI as
central bank of India to control the credit by
i.
Reducing
the quantity of credit
ii.
Raising the
cost of credit
iii.
selecting the purpose for which credit should
be made available or not
The reserve bank keep following aims
while controlling the credit
To boot the economic development
To check the
inflation rate
To see
legitimate credit requirement of trade and industry are duly met
1. RBI maintain some pecentage to provide Credit RBI can rise the bank rate so that
people cannot affordable and may not take credit, on the other hand RBI can
reduce the bank rate and provide more credit
2. RBI can increase the CRR rate i.e cash reserve
ratio so the bank have to maintain that much of cash RBI which also reduces the availability of cash
with or RBI can reduce the CRR which
allow bank give more credit
3. RBI can increase the SLR rate i.e statutory
liquidity ratio so the bank have to maintain that much of cash RBI which also reduces the availability of cash
with or RBI can reduce the SLR which allow bank give more credit
4. RBI adopted
open market operation mainly to
assist governments in the borrowings.
There has been selling of government security To reduce the gap in the
budgetary operation
