EconomicsICSE Class 10 · Chapter 11

Monetary Policy of the Central Bank ICSE Class 10: Credit Control

Updated 14 October 2026 · Fact-checked

Monetary policy is the central bank's policy of controlling the supply of money and credit. ICSE Class 10 tests quantitative credit controls (bank rate, open market operations, cash reserve ratio, statutory liquidity ratio) and qualitative controls (margin requirements, credit rationing, moral suasion), each in brief: what it is and how it expands or contracts credit.

What Monetary Policy of the Central Bank is about

Commercial banks create credit by lending. If they lend too much, spending rises faster than production and prices rise (inflation); if they lend too little, business slows down. The central bank therefore regulates the volume and direction of credit. Its policy for doing so is called monetary policy, and its tools are called credit control measures.

The syllabus divides the tools into two groups. Quantitative (general) measures affect the total volume of credit in the economy: bank rate, open market operations, cash reserve ratio (CRR) and statutory liquidity ratio (SLR). Qualitative (selective) measures affect the direction of credit, that is, which sectors or purposes get loans: margin requirements, credit rationing and moral suasion. A brief understanding of each is required.

The key to every answer is the direction of change: to fight inflation the central bank makes credit dearer or scarcer; to promote growth it makes credit cheaper or more plentiful. CISCE examiners' comments show students confusing CRR and SLR, which the page sets side by side.

Weightage: CISCE publishes no chapter weightage. The paper has a compulsory Section A (40 marks: 16 one-mark MCQs and three 8-mark questions of four 2-mark parts) and Section B, where you answer any four of six 10-mark questions (two 5-mark parts each).Source: CISCE ICSE Economics (641) specimen paper structure, 2025, retained for 2027 by the CISCE circular of 9 October 2026

Key concepts

Meaning and objectives of monetary policy

Monetary policy is the policy of the central bank (in India, the Reserve Bank of India) to control the supply, cost and availability of money and credit in the economy in order to achieve economic objectives.

Objectives: price stability (controlling inflation); economic growth; adequate credit for productive sectors such as agriculture and small industry; a stable exchange rate; and the stability of the banking system.

Two situations:

During inflation (too much money chasing goods): the central bank follows a tight (dear-money) policy, making credit costlier and scarcer.
During a slowdown or deflation: it follows an easy (cheap-money) policy, making credit cheaper and more plentiful.

Worked example

(2 marks) What is monetary policy? Give one objective.

Try it first, then show the solutionSolution

Monetary policy is the central bank's policy of regulating the supply, cost and availability of money and credit - 1 mark.
Objective: price stability (controlling inflation) or economic growth - 1 mark.

Answer: Monetary policy is the policy by which the central bank regulates the supply, cost and availability of money and credit. One objective is to keep prices stable by controlling inflation.

Bank rate

Bank rate is the rate of interest at which the central bank lends to commercial banks, or rediscounts their eligible bills of exchange.

How it works:

To reduce credit (fight inflation): the central bank raises the bank rate. Borrowing from the central bank becomes costlier, so commercial banks raise their own lending rates. Loans become dearer, borrowing falls, and the money supply contracts.
To expand credit (promote growth): it lowers the bank rate; banks lower their lending rates; borrowing and spending increase.

Worked example

(2 marks) How does a rise in bank rate help control inflation?

Try it first, then show the solutionSolution

When the bank rate rises, commercial banks pay more to borrow from the central bank and raise their own lending rates - 1 mark.
Costlier loans reduce borrowing and spending, so the money supply and demand fall, easing prices - 1 mark.

Answer: A higher bank rate makes it costlier for commercial banks to borrow from the central bank, so they charge more on loans. Borrowing and spending fall, reducing the money supply and the pressure on prices.

Open market operations

Open market operations (OMO) are the sale and purchase of government securities by the central bank in the open market.

Sale of securities (to reduce credit): buyers, including banks, pay the central bank for the securities, so money moves out of the banking system. Banks have less cash to lend, and credit contracts.
Purchase of securities (to expand credit): the central bank pays sellers, putting money into the banking system. Banks have more cash to lend, and credit expands.

Worked example

(2 marks) Explain how open market operations can be used to control inflation.

Try it first, then show the solutionSolution

During inflation the central bank sells government securities in the open market - 1 mark.
Buyers pay for them, so cash flows out of banks; banks' lending capacity and credit fall - 1 mark.

Answer: To control inflation, the central bank sells government securities. The money paid for them leaves the banking system, so banks have less to lend and credit contracts.

Cash reserve ratio and statutory liquidity ratio

Cash Reserve Ratio (CRR): the percentage of a commercial bank's total deposits that it must keep as cash reserve with the central bank. Banks earn no interest on it.

Raise CRR: banks must keep more with the central bank, so they have less to lend; credit contracts.
Lower CRR: more funds are available for lending; credit expands.

Statutory Liquidity Ratio (SLR): the percentage of a bank's deposits that it must keep with itself in the form of liquid assets, such as cash, gold and approved government securities.

Raise SLR: more funds are locked in liquid assets, so less is available for loans; credit contracts.
Lower SLR: more is available for lending.

Difference: CRR is kept with the central bank and only in cash, earning no interest; SLR is kept by the bank itself in cash, gold or approved securities, and the securities earn interest.

Worked example

(2 marks) State one difference between the cash reserve ratio and the statutory liquidity ratio.

Try it first, then show the solutionSolution

CRR is a portion of deposits kept with the central bank in the form of cash only - 1 mark.
SLR is a portion of deposits kept by the bank itself in liquid assets such as cash, gold and approved government securities - 1 mark.

Answer: CRR must be kept with the central bank and only as cash, while SLR is maintained by the bank itself in liquid assets such as cash, gold and approved government securities.

Qualitative measures: margin requirements and credit rationing

Qualitative (selective) measures control the direction or purpose of credit rather than its total volume.

Margin requirements: when a bank lends against a security (for example, goods or shares), it lends less than the value of the security; the difference is the margin. If the central bank raises the margin for loans against a particular commodity, borrowers get less credit against it. This is used to curb speculation and hoarding in particular goods (for example, food grains). Lowering the margin increases credit to that sector.

Credit rationing: the central bank fixes limits (quotas or ceilings) on the amount of credit banks may give to certain sectors, or directs them to give a minimum share of credit to priority sectors such as agriculture and small industries. This steers credit towards productive uses and away from speculative ones.

Worked example

(2 marks) Explain how raising margin requirements reduces credit for a particular commodity.

Try it first, then show the solutionSolution

The margin is the difference between the value of the security and the loan given against it - 1 mark.
If the margin is raised, say from 25 to 50 per cent, a borrower gets a smaller loan against the same goods, reducing credit for speculation in that commodity - 1 mark.

Answer: Margin is the part of a security's value that is not lent. If the central bank raises the margin on loans against, say, food grains, traders get smaller loans against their stocks, which reduces credit for hoarding and speculation in that commodity.

Moral suasion and comparing the two groups

Moral suasion: the central bank uses persuasion, advice, requests, letters and meetings with bankers to make banks follow its policy, for example asking them to avoid lending for speculative purposes or to lend more to priority sectors. It has no legal force but works because of the central bank's authority.

Quantitative versus qualitative measures:

Quantitative measures (bank rate, OMO, CRR, SLR) affect the total volume and cost of credit for the whole economy.
Qualitative measures (margin requirements, credit rationing, moral suasion) affect the direction and use of credit for particular sectors or purposes.

Worked example

(2 marks) What is moral suasion? Why is it called a qualitative measure?

Try it first, then show the solutionSolution

Moral suasion is the central bank persuading and advising banks, through letters, meetings and requests, to follow its credit policy - 1 mark.
It is qualitative because it guides the direction and purpose of lending rather than the total volume of credit - 1 mark.

Answer: Moral suasion is the use of persuasion and advice by the central bank to get banks to follow its policy. It is a qualitative measure because it influences where and for what purpose banks lend, not the overall amount of credit.

Monetary Policy of the Central Bank in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Bank rate and borrowing

Suppose prices of everyday goods have been rising fast for months, and news reports say the central bank has raised its policy rate. A month later, your uncle finds that the interest rate on the car loan he planned has gone up.

Explain the chain of events and why the central bank did this.

Try it first, then show the solutionSolution

The central bank raised the rate at which it lends to banks.
Banks passed the higher cost on by raising their loan rates.
Costlier loans reduce borrowing and spending, which helps bring down inflation.

Answer: To fight rising prices, the central bank raised its lending rate; banks raised loan rates, so car loans became dearer. Less borrowing reduces spending and demand, easing inflation.

Memory hook: Rate up, loans dearer, prices cool.

Selective credit control

Imagine traders are borrowing heavily from banks against stocks of onions and holding them back to push up prices before a festival.

Which qualitative measure could the central bank use, and how would it work?

Try it first, then show the solutionSolution

The problem is credit being used for hoarding a particular commodity.
The central bank can raise the margin requirement on loans against onion stocks.
Traders would get smaller loans against their stocks, making hoarding harder and releasing supply.

Answer: It could raise margin requirements on loans against onion stocks, so traders get less credit for hoarding; it could also use moral suasion to ask banks to avoid such lending.

Memory hook: Raise the margin, shrink the hoard.

Easy money policy

Suppose an economy slows down, factories cut production and unemployment rises.

Suggest three quantitative measures the central bank could take, and their direction.

Try it first, then show the solutionSolution

Lower the bank rate so that loans become cheaper.
Buy government securities in the open market to inject money.
Lower CRR (and SLR) so that banks have more to lend.

Answer: The central bank could lower the bank rate, buy securities through open market operations, and reduce CRR and SLR. Each makes credit cheaper or more plentiful, encouraging borrowing, investment and production.

Memory hook: Slowdown: cut rates, buy bonds, free reserves.

Topics in this chapter

Quantitative and Qualitative Credit Control

Monetary Policy of the Central Bank: key facts

Quantitative measures: Bank rate, open market operations, CRR, SLR; Volume of credit.
Qualitative measures: Margin requirements, credit rationing, moral suasion; Direction of credit.
To control inflation: Raise bank rate; sell securities; raise CRR and SLR; raise margins; Tight money.
To promote growth: Lower bank rate; buy securities; lower CRR and SLR; lower margins; Easy money.
CRR vs SLR: CRR: cash with central bank, no interest; SLR: liquid assets with the bank itself

How the board asks Monetary Policy of the Central Bank

The question patterns to expect, and the method that works for each.

Question type	How it is asked	Method
Direction MCQ (Section A)	To control inflation, the central bank will ___ the CRR / sell or buy securities.	Inflation: raise rates and ratios, sell securities. Slowdown: the opposite.
Difference (2 marks)	One difference between CRR and SLR; quantitative versus qualitative.	Where kept and in what form; volume versus direction.
Explain measures (5 marks)	Explain any five instruments of monetary policy.	Define each and state how it contracts or expands credit.

Tricks to remember Monetary Policy of the Central Bank

Short memory aids. Say each one aloud once, then use it on a question the same day.

B-O-C-S and M-C-M
Quantitative: Bank rate, Open market, CRR, SLR. Qualitative: Margin, Credit rationing, Moral suasion.
Use it when: Classifying measures.
Inflation: up, up, sell
Raise rates, raise ratios, sell securities.
Use it when: Anti-inflation policy.
CRR is with RBI
CRR: Cash Reserved at RBI. SLR: Stored Liquid with the bank itself.
Use it when: CRR versus SLR.

Monetary Policy of the Central Bank: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Example 1: OMO direction · 1 mark · MCQBoard level

To control inflation, the central bank will:
(a) buy government securities
(b) sell government securities
(c) lower the CRR
(d) lower the bank rate

Try it first, then show the solutionSolution

Inflation needs a reduction in credit.
Selling securities draws money out of the banking system.

Answer: (b) sell government securities.

Example 2: Classifying a measure · 1 mark · MCQBoard level

Which of the following is a qualitative credit control measure?
(a) Bank rate
(b) Cash reserve ratio
(c) Moral suasion
(d) Open market operations

Try it first, then show the solutionSolution

Bank rate, CRR and OMO affect the volume of credit (quantitative).
Moral suasion influences direction through persuasion (qualitative).

Answer: (c) Moral suasion.

Example 3: Assertion and reason: CRR · 1 mark · Assertion-reasonHarder board level

Assertion (A): A rise in CRR reduces the lending capacity of commercial banks.
Reason (R): Banks must keep a larger part of their deposits as cash with the central bank.
(a) Both A and R are true and R explains A
(b) Both A and R are true but R does not explain A
(c) A is true but R is false
(d) A is false but R is true

Try it first, then show the solutionSolution

Higher CRR means less money left to lend: A is true.
That is because more must be kept with the central bank: R is true and explains A.

Answer: (a) Both A and R are true and R explains A.

Example 4: CRR versus SLR · 2 marks · Very short answerBoard level

State one difference between CRR and SLR.

Try it first, then show the solutionSolution

CRR is kept with the central bank in cash only.
SLR is kept by the bank itself in liquid assets such as cash, gold and government securities.

Answer: CRR is the portion of deposits kept as cash with the central bank, while SLR is the portion kept by the bank itself in liquid assets like cash, gold and approved securities.

Example 5: Five instruments · 5 marks · Long answerHarder board level

Explain any five instruments of the central bank's monetary policy.

Try it first, then show the solutionSolution

Bank rate: rate at which the central bank lends to banks; raising it makes loans dearer.
Open market operations: selling securities absorbs money; buying injects it.
CRR: cash kept with the central bank; raising it reduces lending.
SLR: liquid assets kept by banks; raising it reduces lending.
Margin requirements / credit rationing / moral suasion: direct credit to or away from particular uses.

Answer: (1) Bank rate: raising it makes bank loans costlier, reducing credit. (2) Open market operations: selling securities withdraws money, buying adds it. (3) CRR: a higher ratio leaves banks less to lend. (4) SLR: a higher ratio locks more funds in liquid assets. (5) Margin requirements: higher margins reduce loans against particular goods, curbing speculation.

Example 6: Policy for a slowdown · 5 marks · Long answerHOTS / competency

An economy faces falling demand and rising unemployment. How should the central bank use (a) bank rate, (b) open market operations and (c) CRR? Explain the effect of each.

Try it first, then show the solutionSolution

(a) Lower the bank rate: banks borrow cheaply and cut loan rates.
Cheaper loans encourage investment and consumer spending.
(b) Buy government securities: money flows into banks, raising their lending capacity.
(c) Lower CRR: banks must keep less with the central bank, freeing funds to lend.
Overall, credit expands, demand rises and production and employment recover.

Answer: (a) Lowering the bank rate makes loans cheaper, encouraging borrowing. (b) Buying securities injects money into banks. (c) Lowering CRR frees bank funds for lending. Together these expand credit, raise spending and help production and employment recover.

Example 7: Why qualitative measures are needed · 2 marks · Short answerHOTS / competency

Why does the central bank need qualitative measures in addition to quantitative ones? Give two reasons.

Try it first, then show the solutionSolution

Quantitative measures affect all sectors equally, even those that need more credit.
Qualitative measures can restrict credit for speculation or hoarding while directing it to priority sectors like agriculture.

Answer: Quantitative tools change the overall volume of credit and hit all sectors alike. Qualitative tools let the central bank curb credit for speculation and hoarding in particular goods while channelling credit to priority sectors.

Case-study practice (Section B style)

Read the situation, then answer every part. In the board paper this is a 10-mark question split into 2 + 3 + 5 marks.

Fighting rising prices

Imagine the central bank's report says: 'Prices have risen sharply over the past year. Credit to traders of edible oils has grown fast, and there are signs of hoarding. The bank has decided to tighten money supply while protecting credit to farmers.'

(i) · 2 marks
Name two quantitative measures the bank could use and the direction of each.
Answer
Answer: Raise the bank rate; raise the CRR (also sell securities, raise SLR).
1 mark each.
(ii) · 3 marks
Which qualitative measure could tackle hoarding of edible oils? Explain how.
Answer
Answer: Raising margin requirements on loans against edible oil stocks: traders would get smaller loans against the same stocks, making hoarding costlier. Moral suasion could also be used to ask banks to limit such loans.
1 mark for the measure, 2 for the explanation.
(iii) · 5 marks
How can the bank tighten credit overall yet protect credit to farmers? Explain with credit rationing and moral suasion, and contrast quantitative and qualitative measures.
Answer
Answer: Quantitative measures (bank rate, OMO, CRR, SLR) reduce the total volume of credit for everyone. To protect farmers, the bank can use credit rationing to require banks to keep lending a minimum share to agriculture (priority sector) and use moral suasion to persuade banks to continue farm lending while curbing speculative loans. Qualitative measures thus control the direction of credit, while quantitative ones control its volume.
2 marks for the contrast, 3 for the use of rationing and suasion.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

One difference between CRR and SLR. (2 marks) (2 marks)

Step	Marks
CRR: kept with central bank, cash only.	1
SLR: kept by bank itself, liquid assets incl. gold and securities.	1

Five instruments of monetary policy. (5 marks) (5 marks)

Step	Marks
Bank rate with effect.	1
OMO with effect.	1
CRR with effect.	1
SLR with effect.	1
A qualitative measure with effect.	1

Where students lose marks in Monetary Policy of the Central Bank

The slips examiners see most often, and what to write instead.

Mistake: Confusing CRR and SLR
CISCE examiners' comments, 2025: candidates confused the two credit-control terms.
Wrong working
SLR is kept with the RBI in cash.
Right working
CRR is kept with the RBI in cash; SLR is kept by the bank itself in cash, gold and approved securities.
Do this: CRR = Cash Reserved at RBI.
Usually costs: 2 marks.
Mistake: Wrong direction of a measure
Students reverse the effect (for example, saying buying securities reduces credit).
Do this: Selling securities takes money out; buying puts it in.
Usually costs: 1 mark each.
Mistake: Defining without explaining the effect
Students define bank rate but do not say how it affects credit.
Do this: Always add: raising it contracts credit; lowering it expands credit.
Usually costs: 1 mark per measure in long answers.
Mistake: Mixing qualitative and quantitative groups
Students place margin requirements with quantitative tools.
Do this: Learn B-O-C-S (quantitative) and M-C-M (qualitative).
Usually costs: 1 mark.

Practice questions on Monetary Policy of the Central Bank

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
A rise in the bank rate will generally lead to:
(a) more borrowing
(b) cheaper loans
(c) costlier loans
(d) a rise in money supply
Hint
Cost passes on.
Answer
(c) costlier loans.
Q2 · 1 mark · MCQBoard level
The percentage of deposits that banks must keep with themselves in cash, gold and approved securities is the:
(a) CRR
(b) SLR
(c) bank rate
(d) margin
Hint
Kept by the bank itself.
Answer
(b) SLR.
Q3 · 2 marks · Very short answerBoard level
What is credit rationing?
Hint
Quotas and priorities.
Answer
Credit rationing is a qualitative measure in which the central bank fixes limits on the credit banks may give to certain sectors, or directs them to give a minimum share to priority sectors such as agriculture.
Q4 · 2 marks · Very short answerHarder board level
How does buying government securities in the open market expand credit?
Hint
Money into banks.
Answer
When the central bank buys securities, it pays the sellers, and this money enters the banking system as deposits. Banks then have more cash to lend, so credit expands.
Q5 · 2 marks · Very short answerHarder board level
Distinguish between quantitative and qualitative credit control measures with two examples each.
Hint
Volume versus direction.
Answer
Quantitative measures control the total volume of credit, e.g. bank rate and CRR. Qualitative measures control its direction and use, e.g. margin requirements and moral suasion.
Q6 · 5 marks · Long answerHarder board level
Explain bank rate and open market operations as tools to control inflation.
Hint
Raise; sell.
Answer
Bank rate is the rate at which the central bank lends to banks. Raising it makes their borrowing costlier, so banks raise loan rates and borrowing falls, reducing money supply. Open market operations are the sale and purchase of government securities; selling them takes money out of the banking system, reducing banks' ability to lend. Both reduce spending and help control inflation.
Q7 · 2 marks · Very short answerHOTS / competency
Why might moral suasion work even though it has no legal force?
Hint
Authority of the central bank.
Answer
Banks depend on the central bank for reserves, clearing and help as lender of last resort, and it can use stricter legal tools if ignored, so they usually follow its advice.
Q8 · 5 marks · Long answerHOTS / competency
'Raising CRR and SLR together sends a strong signal.' Explain what both do and why the combination is powerful.
Hint
Two reserves.
Answer
Raising CRR forces banks to keep more cash with the central bank, and raising SLR forces them to hold more liquid assets themselves. Both reduce the funds available for loans. Together they sharply cut lending capacity across the banking system, showing that the central bank is serious about controlling credit and inflation.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.What is the bank rate?Show answer
The rate at which the central bank lends to commercial banks or rediscounts their bills.
2.Name the four quantitative measures.Show answer
Bank rate, OMO, CRR and SLR.
3.Name the three qualitative measures.Show answer
Margin requirements, credit rationing and moral suasion.
4.What should the central bank do with CRR during inflation?Show answer
Raise it.
5.What is moral suasion?Show answer
Persuasion and advice by the central bank to banks.

Best order to study it

Meaning and objectives of monetary policy.
Quantitative measures: bank rate, OMO, CRR, SLR with directions.
Qualitative measures: margins, rationing, moral suasion.
Compare CRR and SLR; compare the two groups.
Practise inflation and slowdown scenarios.

Quick revision checklist

The night before the exam: can you do each of these without looking?

Monetary policy: central bank controls money and credit.
Bank rate up = credit dearer; down = cheaper.
OMO: sell securities = contract; buy = expand.
CRR: cash with RBI; SLR: liquid assets with banks; raising either contracts credit.
Margins: higher margin = smaller loans against goods.
Credit rationing: limits and priorities. Moral suasion: persuasion.

Monetary Policy of the Central Bank: frequently asked questions

Is the repo rate in the syllabus?

The syllabus names bank rate, open market operations, CRR and SLR among quantitative measures. The repo rate works in a similar way but is not listed, so focus on the four named tools.

Why do banks dislike a high CRR?

Because CRR is kept as cash with the central bank and earns no interest, so a higher CRR reduces the funds they can lend profitably.

Do qualitative measures affect the whole economy?

They mainly affect particular sectors or purposes, such as loans against certain commodities, rather than the total volume of credit.

Based on: CISCE ICSE 2027 Economics syllabus; CISCE ICSE 2025 Specimen Question Paper and Marking Scheme, Economics (641)