Page 3 - Lesson Note-47 (1)

The reverse is true in case of deficient demand.

Open market operation: -

It refers to purchase and sell of Government securities in the open
market by the central bank.

• Government securities are sold by the central bank in the open
market by which central bank able to withdraw additional
purchasing power from the public.

• There will a contraction of credit and flow of money into the
economy.
• Purchasing power is curtailed, aggregate demand falls and excess
demand situation is corrected.

The reverse is true in case of deficient demand.

Varying legal reserve ratio: -

Commercial banks maintain reserves in two accounts such as

1. Cash reserve Ratio (CRR) –

It is the minimum percentage of deposits of commercial banks
(net demand and time liabilities) which is kept with RBI in cash.
2. Statutory liquidity Ratio (SLR)-
It is the percentage of deposits of commercial banks (net demand
and time liabilities) which every bank tries to maintain with itself
in the form of designated liquid assets (cash, securities etc)

• During excess demand situation the CRR as well as SLR is to be
increased, that results a decline in lending capacity as well as
credit creation power of commercial banks.
• There will a contraction of credit and flow of money into the
economy.
• Purchasing power is curtailed, aggregate demand falls and excess

demand situation is corrected.

The reverse is true in case of deficient demand.

Qualitative Measures

Margin Requirement-

Margin is the difference between market value of the security offered by
the borrower against the loan and amount of the loan.