ECONOMICS

PROJECT
ROLE OF RBI IN CONTROL OF CREDIT

Dhairya Tamta
12D
20-21/P-18
 ACKNOWLEDGMENT
I would like to express my special thanks of gratitude to my teacher,
Mr. Rajat Sharma who gave me this golden opportunity to make this
project on the topic “ROLE OF RBI IN CONTROL OF CREDIT”.
Secondly, I would like to thank my parents and my friends who
provided me with resources and helped me a lot in finalising the
project and completing it.
 CERTIFICATE
This is to certify that DHAIRYA TAMTA of class XII-D of DELHI PUBLIC SCHOOL,
SONIPAT has completed his project under my supervision. He has taken proper care and
shown utmost sincerity in the completion of the project.
I certify that this project is upto my expectations and as per CBSE guidelines.

Teacher’s Name: MR. RAJAT SHARMA

Sign: _________
 INDEX
S.NO. PARTICULARS SLIDE NO.
1. Credit Control 5
2. RBI 10
3. Deflation 13
4. Inflation 19
5. Monetary Policies 26
6. Conclusion 34
7. Bibliography 35
CREDIT CONTROL
Definition, Objectives and Importance
DEFINITION
Credit control is an important tool used by Reserve Bank of India, a major weapon
of the monetary policy used to control the demand and supply of money (liquidity)
in the economy. Central Bank administers control over the credit that
the commercial banks grant. Such a method is used by RBI to bring "Economic
Development with Stability". It means that banks will not only control inflationary
trends in the economy but also boost economic growth which would ultimately lead
to increase in real national income stability. In view of its functions such as issuing
notes and custodian of cash reserves, credit not being controlled by RBI would lead
to Social and Economic instability in the country.
OBJECTIVES
The Primary Objective according to RBI is to control inflationary tendencies present in the
economy to ensure high economic growth with adequate level of liquidity and maximum
utilization of resources.
• To achieve internal price stability.
• To achieve financial stability.
• To achieve stability in foreign exchange rate.
• To meet the financial requirement during slump in the economy.
OBJECTIVES
• To maximise income, output and employment in the economy.
• To eliminate business cycles and meet business needs.
• To promote economic growth and development of the country.
IMPORTANCE
• It helps in achieving the primary objective of controlling inflation through price stability
and financial stability.
• It helps in boosting the economy by facilitating adequate flow and volume of bank credit
to different sectors and encourages growth of priority sectors by providing adequate
credit to priority sectors essential for economic development.
• Encourages judicious delivery of credit by keeping check on credit granted for
undesirable purposes by commercial banks.
RESERVE BANK OF INDIA
Introduction and Functions
INTRODUCTION
The Reserve Bank of India is India's central bank
and regulatory body under the jurisdiction of Ministry
of Finance, Government of India. It is responsible
for the issue and supply of the Indian rupee and the
regulation of the Indian banking system.
FUNCTIONS
• Issue of Bank Notes
• Banker to Government
• Custodian of Cash Reserves of Commercial Banks
• Custodian of Country’s Foreign Currency Reserves
• Lender of Last Report
• Central Clearance and Accounts Settlement
• Controller of Credit
DEFLATION
Meaning, Causes, Deficient Demand and its Reasons & Impacts
MEANING
Deflation is a decrease in the general price level of goods and services. Deflation
occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces
the value of currency over time, but sudden deflation increases it. This allows more
goods and services to be bought than before with the same amount of currency.
Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e. when inflation
declines to a lower rate but is still positive.
Economists generally believe that a sudden deflationary shock is a problem in a modern
economy because it increases the real value of debt, especially if the deflation is
unexpected. Deflation may also aggravate recessions and lead to a deflationary spiral.
CAUSES
Deflation can be caused by a number of factors, all of which stem from a shift in the
supply-demand curve. The price levels of all goods and services are heavily affected by a
change in supply and demand. If demand drops in relation to supply, aggregate demand
declines and prices fall accordingly.
Likewise, a change in the aggregate demand of a national or single-market currency (such
as the U.S. dollar or the euro) plays an instrumental role in setting the prices of the
country’s goods and services.
REASONS FOR DEFICIENT DEMAND
• Decrease in Propensity to consume: A decrease in consumption expenditure,
due to fall in the propensity to consume, leads to deficient demand in the economy.
• Increase in taxes: AD may also fall due to imposition of higher taxes. It leads to
decrease in disposable income and, as a result, the economy suffers from deficient
demand.
• Decrease in Government Expenditure: When government reduces its demand
for goods and services due to fall in public expenditure, it leads to deficient demand.
REASONS FOR DEFICIENT DEMAND
• Fall in Investment expenditure: Increase in the rate of interest or fall in the
expected returns lead to decrease in the investment expenditure. It reduces the AD and
gives rise to deficient demand.
• Rise in Imports: When international prices are comparatively less than the domestic
prices, then it may lead to a rise in imports, implying a cut in the aggregate demand.
• Fall in Exports: Exports may fall due to comparatively higher prices of domestic
goods or due to increase in the exchange rate for domestic currency. This will lead to
deficient demand.
IMPACTS FOR DEFICIENT DEMAND
• Effect on Output: Due to lack of sufficient aggregate demand, there will be an
increase in the inventory stock. It will force the firms to plan for lesser production
for the subsequent period. As a result, planned output will fall.
• Effect on Employment: Deficient demand causes involuntary unemployment
in the economy due to fall in the planned output.
• Effect on General Price Level: Deficient demand causes the general prices to
fall due to lack of demand for goods and services in the economy.
INFLATION
Meaning, Causes and Excess and its Reasons & Impacts
MEANING
Inflation is the rate of increase in prices over a given period of time.
Inflation is typically a broad measure, such as the overall increase in prices
or the increase in the cost of living in a country. But it can also be more
narrowly calculated—for certain goods, such as food, or for services, such as
a haircut, for example. Whatever the context, inflation represents how much
more expensive the relevant set of goods and/or services has become over a
certain period, most commonly a year.
CAUSES
• Primary Causes
• Increase in Public Spending
• Deficit Financing of Government Spending
• Increased Velocity of Circulation
• Population Growth
• Hoarding
• Genuine Shortage
CAUSES
• Exports
• Trade Unions
• Tax Reduction
• The imposition of Indirect Taxes
• Price-rise in the International Markets
REASONS FOR EXCESS DEMAND
• Rise in the Propensity to consume: Excess demand may arise because of
increase in consumption expenditure due to rise in the propensity to consume or
fall in propensity to save.
• Reduction in taxes: It may also occur due to increase in disposable income and
consumption demand because of decrease in taxes.
• Increase in Government Expenditure: Rise in government demand for
goods and services due to increase in public expenditure will also result in excess
demand.
REASONS FOR EXCESS DEMAND
• Increase in Investment: Excess demand can also arise when there is increase in
investment due to decrease in rate of interest or increase in expected returns.
• Fall in Imports: Decrease in imports due to higher international prices in comparison
to domestic prices may also lead to excess demand.
• Rise in Exports: Excess demand may also arise when demand for exports increases due
to comparatively lower prices of domestic goods or due to decrease in the exchange rate
for domestic currency.
• Deficit Financing: Excess demand may be caused due to increase in the money supply
caused by deficit financing.
IMPACT OF EXCESS DEMAND
• Effect on Output: Excess demand does not affect the level of output because
economy is already at full employment level and there is no idle capacity in the
economy.
• Effect on Employment: There will be no change in the level of employment as
the economy is already operating at full employment equilibrium and there is no
involuntary unemployment.
• Effect on General Price Level: Excess demand leads to rise in the general price
level (known as inflation) as aggregate demand is more than aggregate supply.
MONETARY POLICIES
Meaning, Advantages, Disadvantages
MEANING
Monetary policy is the policy adopted by the monetary authority of a
nation to control either the interest rate payable for very short-term
borrowing (borrowing by banks from each other to meet their short-
term needs) or the money supply, often as an attempt to
reduce inflation or the interest rate, to ensure price stability and
general trust of the value and stability of the nation's currency.
ADVANTAGES
• Expansionary monetary policy makes it possible for more investments come in and
consumers spend more.
With the banks lowering the interest rates on mortgages and loans, more business owners
will be encouraged to expand their businesses since they are more available funds to
borrow with interest rates that they can afford. On the other hand, prices of commodities
will be lowered and the buying public will have more reason to buy more consumer
goods. In the end, companies will profit while their customers are able to afford what
they need like basic commodities, property and services.
ADVANTAGES
• Lowered interest rates also lower mortgage payment rates.
Another advantage of monetary policy in relation to lowered rates is that it also affects
the payments home owners need to meet for the mortgage of their homes. Reduced
mortgage fees will leave home owners more money to spend. Also, they will be able to
settle their monthly payments regularly. This is a win-win situation for merchandisers,
creditors and property investors as well.
ADVANTAGES
• It allows the Central Bank to apply quantitative easing.
The Federal Reserve can make use of this policy to print or create more money which
enables it to purchase government bonds from banks. The end result is increased cash
reserves in banks and also monetary base. This also leads to reduced interest rates and
more money for the bank to lend its borrowers.
DISADVANTAGES
• Despite expansionary monetary policy, there is still no guaranteed economy
recovery.
Some economists who criticize the Federal Reserve on the policy say that in times of
recession, not all consumers will have confidence to spend and take advantage of low
interest rates. If this is the case, then it is a disadvantage.
DISADVANTAGES
• Cutting interest rates is not a guarantee.
Others also claim that even if the banks are given lower interest rates by the Central Bank
when they borrow money, some banks might have the funds. If this happens, there will be
insufficient funds people can borrow from them.
DISADVANTAGES
• It will not be useful during global recession.
Proponents of expansionary monetary policy say that even if banks will lower interest
rates and more consumers will spend money, during a global crisis, the export industry
might suffer. They say that if this is the current situation, the losses of exporters are more
than what businesses can earn from sales.
 CONCLUSION
The effectiveness of credit control measures in an economy
depends upon a number of factors.
First, there should exist a well organized money market. Second,
a large proportion money in circulation should form part of the
organized money market. Finally, the money and capital markets
should be extensive in coverage and elastic in nature.
 BIBLIOGRAPHY
• www.wikepedia.com
• www.bbamantra.com
• www.imf.org
• www.yourarticlelibrary.com
• www.toppr.com
• www.futureofworking.com