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How does reserve bank of india …

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How does reserve bank of india clàssify the supply of money

Posted by Tanya Jalan 6 years, 5 months ago

CBSE > Class 12 > Economics

1 answers

Sia ? 6 years, 5 months ago

Open Market Operations: Open Market Operations is when the RBI involves itself directly and buys or sells short-term securities in the open market. This is a direct and effective way to increase or decrease the supply of money in the market. It also has a direct effect on the ongoing rate of interest in the market. Let us say the market is in equilibrium. Then the RBI decides to sell short-term securities in the market. The supply of money in the market will reduce. And subsequently, the demand for credit facilities would increase. And so correspondingly the rate of interest would also see a boost. On the other hand, if RBI was purchasing securities from the open market it would have the opposite effect. The supply of money to the market would increase. And so, in turn, the rate of interest would go down since the demand for credit would fall.
Repo rate: Repo rate is the rate at which Reserve Bank of India (RBI) lends funds to commercial banks for a period ranging from 1 day to 14 days. It is quite an effective quantitative tool for controlling credit creation. If the RBI wants to decrease the level of credit creation in the country, then it increases the Repo Rate which makes the credit dearer. As the cost of borrowings increase, the people's demand for credit goes down. This also leads to a fall in liquidity. All this leads to falling in the rate of credit creation. On the other hand, if the RBI wants to increase the level of credit creation in the economy then it decreases the repo rate which makes the credit cheaper. As the cost of borrowings falls, people's demand for credit goes up. This leads to an increase in the rate of credit creation.

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