Q.Explain the quantitative methods of credit control used by the Reserve Bank of India, and show how each is used to control inflation.

Quantitative tools all change the total amount of credit; the answer should explain each tool and then show the tightening direction used against inflation.

Each tool works on the same logic: during inflation the RBI makes credit scarcer and dearer so that borrowing and spending fall and prices cool down.

Quantitative (general) methods of credit control affect the total volume of credit in the whole economy. Section d describes the main tools; to control inflation the RBI uses each in its contractionary direction, because inflation means too much credit and spending are pushing prices up.

1. Bank rate. The bank rate is the rate at which the RBI lends to, or rediscounts the bills of, commercial banks. To control inflation, the RBI raises the bank rate. Borrowing from the RBI becomes costlier, so banks raise their own lending rates; loans become dearer, borrowing by the public falls, and credit contracts.

2. Open market operations (OMO). These are the buying and selling of government securities by the RBI. To control inflation, the RBI sells securities. Buyers pay with cheques on their banks, so cash flows out of the banks to the RBI; banks' reserves fall and their power to create credit shrinks.

3. Cash reserve ratio (CRR). The CRR is the share of deposits banks must keep with the RBI. To control inflation, the RBI raises the CRR. Banks must now park more of their deposits with the RBI, leaving less to lend, so credit contracts. Because banks lend a multiple of their reserves, even a small rise in the CRR sharply reduces total credit.

4. Statutory liquidity ratio (SLR). Banks must keep a minimum share of deposits with themselves in liquid assets (cash, gold, approved securities). To control inflation, the RBI raises the SLR, again leaving banks less to lend.

5. Repo rate. The repo rate is the rate at which banks borrow short-term funds from the RBI against securities. To control inflation, the RBI raises the repo rate, making such borrowing costlier and contracting credit.

In short, every quantitative tool follows the same logic during inflation: the RBI makes credit scarcer and dearer, so that borrowing, spending, and demand fall, and the upward pressure on prices eases.

A very common error is to explain the tools correctly but give the wrong direction for inflation (e.g. writing 'buy securities' or 'lower the CRR'). During inflation the RBI always TIGHTENS: raise rates/ratios and SELL securities.