Role of RBI in

Control of Credit
Self Introduction
Name: S.Surya

Class: XII Division: D

Subject: Economics

School Name: Podar

International School
 Acknowledgement
I would like to convey my sincere thanks to Mrs
Jhuma Aikat my Economics teacher, who always
gave me valuable suggestions and guidance
during the project. She was a source of
inspiration and helped me to understand and
remember important details of the project as
well as our principal Mrs. Soma Chatterjee who
gave me a wonderful opportunity to work on this
project. I also thank my parents and friends for
their help and support in finalising this project
within the limited time frame.

Place: Podar Name: S.Surya

International School

Date: Signature:
 PODAR INTERNATIONAL SCHOOL, CBSE-NERUL
CERTIFICATE
THIS IS TO CERTIFY THAT

OF CLASS

HAS SUCCESSFULLY COMPLETED HIS / HER

PROJECT ON THE TOPIC

AS PRESCRIBED BY

DURING THE ACADEMIC YEAR 20 - 20 AS PER THE GUIDELINES

ISSUED BY CENTRAL BOARD OF SECONDARY EDUCATION - CBSE.

Date: -

SUBJECT TEACHER PRINCIPAL

Index
Sr No. TOPICS
1 Introduction

2 Meaning of Credit

3 Objectives of Credit Control

4 Types of Credit Control Measures

5 Quantitative vs. Qualitative

6 Importance of Credit Control

7 Credit Control & Inflation

8 Credit Control & Deflation

9 Credit Control & Economic Slowdown

10 How RBI Directs, Regulates, and Stabilizes Credit

11 Effectiveness of RBI’s Credit Control

12 Chanllenges Faced of RBI

13 Suggestions to Improve RBI’s Credit Control

14 Conclusion

15 Bibliography
 Introduction
The Reserve Bank of India (RBI), established in 1935,
is the central bank of the nation and is entrusted with
the management of the financial system. Its biggest
task is to manage credit in the economy. The RBI
uses different tools to manage the quantity and
direction of credit to bring stability to the economy.
The basic idea is to extend credit for productive
purposes without the kind of lending that results in
inflation or speculation. Proper credit control by the
RBI provides price stability, encourages growth, and
keeps the overall financial health of the country
intact.
In a developing economy such as India, where
economic growth and price control have to go hand
in hand, credit control is a sensitive and crucial
operation. By managing the supply and price of
credit, RBI steers the economy toward balanced and
sustainable growth.
Meaning of
Credit
Credit refers to the ability of individuals,
businesses, or governments to obtain goods,
services, or money in exchange for a promise
to repay at a future date. It plays a vital role in
the modern economy by allowing consumers
to spend before they earn and enabling
businesses to invest in growth even without
immediate funds.

In the banking system, credit primarily means the amount of

money that banks lend to customers. This lending helps in
increasing production, employment, and overall economic
development. However, excessive or uncontrolled credit in the
economy can lead to inflation, rising prices, and instability. On
the other hand, insufficient credit may slow down economic
activities and lead to unemployment.

Therefore, managing the flow of credit is

crucial for maintaining economic balance.
The Reserve Bank of India (RBI), as the
central bank, regulates the supply of credit
in the country. By using various monetary
tools, it ensures that credit is available in
the right amount, to the right sectors, and
at the right time.
 Objectives of
Credit Control
The RBI employs credit control to maintain
financial stability and promote balanced
economic growth. The main objectives of credit
control are as follows:

The main objective is to keep the money stable. The RBI

attempts to control the amount of money in circulation in
such a manner that it is consistent with the needs of a growing
economy and does not cause inflation. The RBI stabilizes the
value of money by controlling credit.

The second task is to manage inflation and deflation. During

high inflation, the RBI curbs credit to limit the supply of money.
During deflation or economic slowdown, it promotes credit
growth to increase demand and production.

The third objective is to promote economic

growth. In order to ensure that adequate credit is
extended to broad sectors such as industry,
agriculture, and infrastructure, RBI promotes
rapid growth.

Exchange rate stability is another

objective. Credit control helps regulate
the supply of foreign exchange and
protects the exchange value of the
rupee.
 Types Credit
Control Measures
A) Quantitative Measures
Quantitative credit control tools, or tools of
universal credit control, are used by the Reserve
Bank of India (RBI) to regulate the size of credit in
the economy as a whole. They are used across all
sectors uniformly and are meant to affect the
aggregate money supply, keep inflation at bay, and
maintain economic stability.

1) Bank Rate Policy :

Bank rate refers to the rate at which RBI
provides loans without collateral to
commercial banks. When RBI raises the
bank rate, it becomes more costly for the
commercial banks to borrow from the
central bank. This increases the cost of
interest on the borrowers, lowers the
demand for loans, and thus tames
inflation. On the other hand, a lower
bank rate promotes borrowing and
raises credit supply.
2) Open Market Operations:
In this process, the RBI sells or
purchases government securities in the
open market. When the RBI sells, it
takes up excess money in the banking
system, lowering the level of credit.
Conversely, buying securities puts
liquidity into the market, leading to
more lending.

3) Cash Reserve Ratio (CRR):

CRR is a fraction of a bank's total deposits that it is
required to hold in cash with the RBI. CRR is greater
when banks have fewer funds to lend and hence
credit is lower. Lending capacity is increased by lower
CRR.

4) Statutory Liquidity Ratio

(SLR):
SLR is the proportion of deposits that banks must keep
in liquid form like gold or government securities.

Increasing the SLR limits the

money available for lending, which
slows down the credit in the
economy.
 Types Credit
Control Measures
B) Qualitative Measures
Qualitative measures, or selective credit control
instruments, are used by the Reserve Bank of India
(RBI) in order to regulate the shape, position, and
reason why credit is utilized in the economy.
Quantitative measures regulate the total volume of
credit, while qualitative instruments attempt to
direct credit to productive and priority sectors and
deter speculative or unproductive uses.

1) Margin Requirements
Margin is defined as the amount by
which the value of the deposited
security value exceeds the amount lent.
An increase in the margin requirement
by the RBI curtails the borrowing
capacity of individuals or institutions.
This discourages borrowing to finance
speculative transactions, i.e., investment
in the share market, and ensures that
credit is used for more necessary and
productive ends.
 2) Credit Rationing
Credit rationing is the limiting of the
volume of credit that may be extended
by banks to particular sectors or
purposes. It is practiced in order to
extend sufficient credit to essential
sectors like agriculture, small industry,
and exports and not to allow non-
essential or risky sectors to over-
borrow.

3) Moral Suasion
By moral suasion, RBI influences commercial banks to
adopt its credit policies. It is not a statutory
intervention, whereby RBI meets, issues circulars, or
gives informal advice to banks. Banks normally adhere
to the RBI's advice, although not binding in law.

4) Direct Action
If a bank does not comply with RBI instructions or
engages in unsound banking, RBI has the power to take
action directly.
It may be in the shape of lending
restrictions, penal measures, or
even withdrawal of banking
facilities.
 Quantitative vs.
Qualitative

Quantitaitve Credit Qualitative Credit

Control Control

Regulate the overall volume of Regulate the purpose and

credit in the economy direction of credit

Broad-based control on total Sector-specific or purpose-

credit supply specific control

Entire banking system and Specific sectors like agriculture,

economy-wide money flow real estate, or industry

Less flexible; applies More flexible; can be

uniformly across customized for
sectors particular sectors
Importance
of Credit Control
Credit control is the most important function
of Reserve Bank of India (RBI) that controls
the flow of credit in the economy. Credit
control assists in maintaining economic and
financial stability through the control of
availability and flow of funds.

One of the main functions of credit control is to regulate

inflation and deflation. During inflation, the RBI uses credit
control techniques to tighten the money and credit supply in
the system in order to reduce prices. During deflation or when
there is a slump, the RBI eases credit conditions to augment
demand and spur economic growth.

Credit control also promotes sectorally balanced growth. By

directing the flow of credit to priority sectors such as
agriculture, infrastructure, and small-scale industries and
restricting credit to speculative or non-essential sectors, the RBI
promotes inclusive and sustainable growth.
Apart from that, it keeps the financial
system stable. By keeping a check on
commercial bank lending and regulating
excessive growth in credit, the RBI prevents
risks like bad loans and financial bubbles.
This instills public faith in the banking
sector.
 Credit Control
& Inflation
Inflation is a condition where the general level of
prices of goods and services rises slowly, reducing the
purchasing power of money. Controlling inflation is
one of the most significant objectives of the RBI, and
one of its most potent tools is credit control. Since
inflation is most often the outcome of surplus money
and credit in the economy, the control of the supply of
credit becomes necessary to ensure stable prices.

The RBI follows a contractionary monetary policy to curb

inflation. It consists of curtailing the supply of credit in the
economy to curb excess demand. The RBI raises the Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which
lowers the lending power of the bank.

It can also raise the bank rate and repo rate,

which increases the cost of borrowing for
banks and thus for consumers and businesses.
This lowers aggregate expenditure, and
inflation decreases.

Another useful instrument is Open

Market Operations (OMO). In times of
inflation, the RBI sells government
securities in the market to mop up
excess money, draining liquidity and
curbing inflationary pressures.
 Credit Control &
Inflation
By these steps, the RBI is able to prevent
money from entering the economy too
heavily, particularly for speculative or
non-productive uses. It seeks to achieve
price stability, safeguard consumer
purchasing power, and promote long-
term economic growth.

Therefore, credit control is an

important and effective tool in the
RBI's quest to keep inflation under
check and usher in financial
stability.
 Credit Control &
Deflation
Credit control is also essential in controlling
deflation within an economy. Deflation is a
sustained decline in the overall price level of
goods and services. It typically results from
decreased consumer spending, over-supply, or a
dearth of credit. Deflation might appear to be
desirable when prices drop, but it is undesirable
over the long term—it reduces consumption,
lowers profits for businesses, raises the number
of unemployed persons, and accelerates
economic growth.

In such a case, the Reserve Bank of India

(RBI) or central bank applies the policies
of credit control to pump liquidity into
the economy. The aim is to stimulate
borrowing, consumption, and
investment, thus halting the
deflationary spell.
To combat deflation, the RBI employs
expansionary measures of credit control:
Reducing the repo and reverse repo rates,
making loans cheaper for banks and
customers.
Cutting the Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR), allowing
banks to lend more money.
Purchasing government securities through
Open Market Operations to boost the supply
of money.
Relaxation of margin requirements and
issuing positive directives to encourage credit
flow.
These actions make credit cheaper and available,
making it easier for businesses to invest and for
people to consume. This results in higher demand,
better production, employment generation, and
eventually, price stabilization.

Therefore, credit control proves to be a powerful

mechanism in combating deflation and bringing back
balance in the economy. The timely and adaptable action
of the central bank is instrumental in ensuring economic
stability.
Credit Control
& Economic Slowdown
An economic downturn is established when
there is a steep fall in economic activities such
as production, investment, and employment.
During such periods, the demand for goods
and services falls, causing reduced business
profits and reduced incomes. During such
periods, the Reserve Bank of India (RBI) has a
significant role to play in boosting the
economy by making alterations in its credit
control policies.
RBI employs an expansionary monetary policy to combat an
economic slowdown. This is a policy that increases the supply
of money in an economy. It does so by lowering key interest
rates such as the bank rate, repo rate, and reverse repo rate.
These cuts lower the borrowing cost for commercial banks and
encourage them to borrow more funds from their depositors
and lend more funds to consumers and businesses.

RBI employs an expansionary monetary

policy to combat an economic slowdown.
This is a policy that increases the supply of
money in an economy. It does so by
lowering key interest rates such as the bank
rate, repo rate, and reverse repo rate. These
cuts lower the borrowing cost for
commercial banks and encourage them to
borrow more funds from their depositors
and lend more funds to consumers and
businesses.
Credit Control
& Economic Slowdown
The resulting increased flow of
credit encourages investment,
production, and consumption,
which in turn encourages demand
and assists in getting the economy
into full gear. This assists in further
reducing unemployment and
enhancing overall economic
confidence.
Overall, in the event of an
economic slowdown, the RBI
employs credit control
measures in a facilitative
manner to stimulate economic
activity, restart growth, and lend
stability to the financial system.
 How RBI Directs,
Regulates, and
Stabilizes Credit
The Reserve Bank of India (RBI), being the central
bank, does not merely regulate the amount of credit in
the economy but also regulates its direction and
allocation. Beyond mere regulation, it has the role of
ensuring that credit goes to promote inclusive growth,
prevents speculative abuse, and stays stable at times of
financial crisis.

Sectoral credit allocation is one of the key mandates of the RBI.

It does this by instructing commercial banks to lend a specified
percentage of their loans to agriculture, micro and small
industries, housing, education, and weaker sections through its
Priority Sector Lending (PSL) guidelines. This encourages
balanced growth by way of giving due importance to essential
but under-financed sectors. .

Also, the RBI collaborates with the likes

of NABARD and issues refinance
schemes or interest subventions to
promote credit flow into non-profitable
but necessary sectors such as agriculture.
It also keeps a check on credit-deposit
ratios, especially in the rural and semi-
urban zones, to avert regional
imbalances.
At the same time, the RBI acts to prevent
speculative credit, which is understood as
loans applied towards risky or unproductive
purposes like speculation in the stock market,
bubbles in real estate, or commodity hoarding.
Such credit can drive prices up and destabilize
the economy. The RBI prevents it by using
qualitative measures such as margin
regulation, orders to banks, and moral suasion.
These controls deter lending for risky
speculative use and channel credit into
productive areas such as manufacturing and
infrastructure.

During periods of financial crises, for instance, the 2008 world

meltdown or the COVID-19 pandemic, the RBI acts as a
stabilizing factor. It uses expansionary monetary measures,
like decreasing the repo rate, reverse repo rate, CRR, and SLR,
to expand the money supply and soften the cost of borrowing.
The RBI also uses measures such as Targeted Long-Term Repo
Operations (TLTROs) to channel liquidity to priority sectors,
including MSMEs and housing. It might enable loan
moratoriums to provide the borrowers with sufficient time to
revive.
In conclusion, the RBI’s role in controlling
credit is not limited to quantity but extends to
where credit flows, how it is used, and how it's
managed in times of crisis. Whether by
supporting under-served sectors, discouraging
risky credit behavior, or intervening during
financial downturns, the RBI ensures that the
flow of credit remains a powerful tool for
national growth, financial stability, and
economic resilience.
 Effectiveness of RBI’s
Credit Control
Reserve Bank of India (RBI) is also tasked with regulating the
credit flow in the economy through monetary instruments.
The credit control activities of RBI are intended to provide
price stability, promote economic growth, and establish
financial discipline within the nation. The efficiency of these
actions relies on the implementation of these measures and
how responsive the economy will be to make such
adjustments.

One of the key strengths of RBI’s credit control is its ability to

influence the cost and availability of credit. By adjusting the
repo rate, bank rate, CRR (Cash Reserve Ratio), and SLR
(Statutory Liquidity Ratio), the RBI can control inflation and
stimulate or slow down economic activity.

For instance, during inflation, it raises

rates to make borrowing more expensive,
thereby reducing spending. During
slowdowns, it lowers rates to encourage
borrowing and investment.
Effectiveness of
RBI’s Credit Control
RBI also employs Open Market Operations
(OMO) and qualitative instruments like moral
suasion, credit rationing, and margin
requirements to manage the flow of credit into
targeted sectors. These instruments assist in the
targeting of speculative or non-essential lending
and the channeling of credit into priority sectors
like agriculture and small industry.

Still, the efficacy of such measures can be restricted

by a variety of challenges. Poor transmission of
policy rates by banks, global economic pressures,
large informal sector, and fiscal deficits can dampen
the effect of credit control. Also, commercial banks
do not always conform to RBI guidelines to the
fullest, which can restrict policy success.

In spite of these difficulties, the credit control

measures of the RBI have gone a long way in
ensuring monetary stability in India.
Supported by prudent fiscal policies and
effective banking, these measures get even
stronger to guide the economy along the right
lines.
 Challenges
Faced by RBI
Although the Reserve Bank of India (RBI) has the role of
managing credit as well as ensuring financial stability, it is
constrained by a number of challenges that may reduce the
effectiveness of its policies. These challenges involve both
internal and external sources and tend to need to be balanced
very carefully by the central bank.

One of the main issues is the ineffective transmission of

monetary policy. The RBI can lower policy rates, including the
repo rate, but commercial banks do not always push the benefit
to borrowers at once. Such a delay makes the effect of credit
control measures on the overall economy weaker.

Another issue is the large informal sector in India, which

operates outside the formal banking system. Since a significant
portion of economic activity and lending happens informally,
the RBI’s credit control tools may not fully influence this sector.

Fiscal dominance is also an issue. When

the state indulges in high spending
financed through large borrowings, it can
drive out private borrowing and restrict
the RBI from effectively managing
liquidity as well as interest rates.
 Challenges Faced
by RBI
Additionally, global economic pressures
such as oil price fluctuations, foreign
exchange volatility, and geopolitical tensions
can disrupt domestic credit conditions.
These external factors often force the RBI to
adjust its policies in response to events
beyond its control.

Lastly, the rise of digital and non-

banking financial companies (NBFCs)
has introduced new complexities.
These entities may not always follow
RBI’s strict regulations, leading to gaps
in credit control.

In spite of all these challenges, the RBI

still keeps modifying its policies and
evolving new instruments to ensure
credit discipline and economic
stability.
 Suggestions to Improve
RBI’s Credit Control

Real Time Sector Specific Modernize

Monitering Focus Tools with Tech

Faster Policy
Action Use AI & Data
Analytics for
Target Priority
Better Decisions
Sectors

Financial
Inclusion

Ensure credit Transparency &

control doesn’t Communication
harm small
borrowers Clear guidance to
markets & public
trust
 Conclusion
The Reserve Bank of India (RBI) is a custodian of financial
stability as it regulates the movement of credit in the
economy. With its well-calibrated credit control policy, RBI
ensures that credit flows in the correct amount at the
correct time and to the correct sector. This is crucial in
fostering economic growth, managing inflation, and
ensuring price stability.
Through quantitative instruments such as the repo rate,
CRR, SLR, and Open Market Operations, the RBI controls
the total supply of money within the banking system.
Qualitative instruments such as moral suasion, credit
rationing, and selective credit control guide the credit to
productive sectors such as agriculture, small industry, and
exports.
In short, the RBI's function as a credit controller is
imperative for striking growth as well as stability. Its timely
actions shield the economy from financial disequilibria,
promote national priorities, and make credit an instrument
of development and not speculation.
 Bibliography
Reserve Bank of India – Official Website
www.rbi.org.in
(For policy updates, credit control tools, and circulars related
to banking and finance.)

NCERT Economics Textbook – Class XII

National Council of Educational Research and Training
(NCERT), Government of India.
(For understanding credit control, monetary policy, and the
role of RBI in India’s economy.)

The Economic Times

www.economictimes.indiatimes.com
(For real-world examples and news articles related to RBI
decisions and financial crises.)

Business Standard
www.business-standard.com
(Used for referencing current monetary
policy actions and expert analysis.)

RBI Annual Reports & Monetary Policy

Statements
(Available on RBI’s official website under
“Publications.”)