Commercial Banks and the Central Bank — Part 2: The Reserve Bank and Credit Control: visual lesson, ISC Class 12 Economics

Lesson

The Reserve Bank and Credit Control

Part 2 — the Reserve Bank of India, its functions, and the quantitative and qualitative tools it uses to control credit.

In this lesson you will

Explain the functions of the Reserve Bank of India
Explain how each quantitative instrument changes the flow of credit, and recommend its direction
Distinguish quantitative from qualitative methods and explain the qualitative tools

Part 2 at a glance

Diagram

Set up in 1935; nationalised in 1949.
Function	What the RBI does
Bank of issue	Sole issuer of currency notes, except one-rupee notes
Banker to government	Keeps its accounts, makes payments, manages its debt
Bankers' bank	Holds banks' reserves, clears their claims, supervises them
Lender of last resort	Lends to sound banks in a crisis
Custodian of foreign exchange	Holds foreign currencies and gold; steadies the rupee
Controller of credit	Uses quantitative and qualitative tools

Concept

It keeps the government's accounts and manages its debt; it holds banks' reserves, clears their claims and supervises them.

Table comparing a commercial bank and the Reserve Bank of India: aim, whom they deal with, currency issue and their relation to credit
	Commercial bank	Reserve Bank of India
Aim	Profit	Monetary and financial stability
Deals with	The public	Banks and the government
Currency	Cannot issue notes	Sole issuer of notes (except ₹1)
Credit	Creates credit	Controls credit