a. What is meant by Repo Rate? How does the Central Bank use this measure to control inflationary conditions in an economy?

b. What is meant by Margin Requirement? How does the Central Bank use this measure to control deflationary conditions in an economy?

The central bank is the apex bank which has the sole authority to control all the commercial banks and financial institution in the economy. When the central bank controls all the financial institutions in the economy, it is also vested with the function of credit control in the c-economy. It is one of the most important functions of the central bank in the economy. The central bank has many tools which are used to control the credit in the economy. They are

a. Reserve ratios such as Cash Reserve Ratio, Statutory liquidity ratio,

b. Bank rate

c. Open market operation

d. Margin requirements

e. Moral suasion etc.

Repo rate is a part of open market operations. It is the rate at which the commercial banks within the country borrows money from the Central Bank. It is done through the purchase and sales of government securities. Commercial banks are the sellers and the Central Bank is the buyer of the securities.

It is a monetary policy instrument which can be used to control the money supply in the country. The repo rate is the method of quantitative credit control method used by the central bank. Credit control methods are being used to control the inflation and deflation that is occurred in the economy. When the economy faces inflation then the central bank will borrow funds from the commercial banks. Thus the ability of the commercial banks to lend loans is reduced. This reduces the money supply in the economy and inflation is controlled.

b.

The central bank is the apex bank which has the sole authority to control all the commercial banks and financial institution in the economy. When the central bank controls all the financial institutions in the economy, it is also vested with the function of credit control in the c-economy. It is one of the most important functions of the central bank in the economy. The central bank has many tools which are used to control the credit in the economy. They are

a. Reserve ratios such as Cash Reserve Ratio, Statutory liquidity ratio,

b. Bank rate

c. Open market operation

d. Margin requirements

e. Moral suasion etc.

Margin requirements are one of the qualitative methods of credit control measures of the central bank. This method is adopted by the central bank so as to prevent excessive use of credit to purchase or carry securities by the speculators. To control the money flow in the economy, the central bank fixes the minimum margin requirements on loans. This can be a percentage of loan sanctioned for the securities produced as collateral.

In the case of inflation in the economy, the central bank would increase the margin requirements to reduce the flow of money in the economy. This reduces the flow of credit in the economy and inflation can be controlled.