Commerce · Ch 10 — Reserve Bank of India

Monetary Policy — Quantitative and Qualitative Tools of Credit Control

The RBI controls the volume and direction of credit in the economy through two broad categories of tools.

Quantitative (general) tools — these affect the total volume of credit available in the economy, without discriminating between uses:

Tool	How it works
Bank Rate	The rate at which the RBI lends long-term funds to commercial banks; raising it makes bank borrowing costlier, discouraging credit expansion, and vice versa.
Repo Rate	The rate at which the RBI lends short-term funds to banks against government securities (under a repurchase agreement); the RBI's key short-term policy rate today.
Reverse Repo Rate	The rate at which the RBI borrows funds from banks, absorbing excess liquidity from the banking system.
Cash Reserve Ratio (CRR)	The minimum percentage of a bank's total deposits that it must keep as cash reserves with the RBI; raising CRR reduces the funds a bank has available to lend.
Statutory Liquidity Ratio (SLR)	The minimum percentage of a bank's net demand and time liabilities that it must maintain in liquid assets (cash, gold, approved government securities) with itself; raising SLR reduces funds available for commercial lending.
Open Market Operations (OMO)	The RBI's buying and selling of government securities in the open market; selling securities withdraws money from the banking system, buying releases money into it.

Qualitative (selective) tools — these regulate the direction and purpose of credit, not just its total volume:

Margin requirements — fixing the minimum margin (own contribution) a borrower must provide against the value of security pledged for a loan; raising the margin discourages speculative borrowing against a particular commodity.
Moral suasion — informal persuasion and advice by the RBI to banks (through letters, discussions and meetings) to follow a particular credit policy, without a legal directive. …