Functions of central bank – Controller of credit or money supply in the economy

The chief objective of a central bank is to maintain level of prices and thereby stability in the value of money.for this the central bank has to control and regulate the volume and use of credit.

Credit control is generally considered to be the principal function of the central bank.

The central bank controls the volume of credit and money supply in the country.

The main objective is to maintain price and economic stability in the country.

To control inflation it has to restrict the supply of credit and to prevent depression and deflation it has to expand credit.

There are various methods which the central bank uses to control the money supply in the country.

They are

a] Quantitative tools of credit control  or the General measures

Quantitative measures control the quantity or the volume of credit created by the commercial banks eg the bank rate, open market operations cash reserve ratio etc.

These measures are designed to expand or contract the liquidity position of commercial banks.

These measures have a quantitative effect on the supply of credit in the economy.

b] Qualitative tools of credit control or the Selective measures.

Qualitative measures deal with the purpose use and direction of credit for eg varying margin requirements, regulation of credit, publicity, direct action etc.

These measures are designed to bring financial discipline in the banking sector.

We shall deal with this function at considerable length later.

Posted in General Economics