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MONETARY POLICY Qualitative Instruments PART 8 BY AYUSSH SANGHI
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Qualitative Tools These are those tools through which the central bank not only controls the value of loans but also the purpose for which these loans are assigned by the commercial banks.
Qualitative Instruments of Monetary Policy The quantitative measures are stated as the following: Moral suasion, Rationing of Credit, Direct Action, Margin Requirements
Moral Suasion * Moral suasion means persuasion and request. * To arrest inflationary situation central bank persuades and requests the commercial banks to refrain from giving loans for speculative and non- essential purposes On the other hand, to counter deflation central bank persuades the commercial banks to extend credit for different purposes. * Under Moral Suasion, RB Under Moral Suasion, RBI issues periodical letters to bank to exercise control over credit in general or advances against particular commodities.
Moral Suasion * Periodic discussions are held with authorities of commercial banks in this respect. In India, from 1949 onwards the Reserve Bank has been successful in using the method of moral suasion to bring the commercial banks to fall in line with its policies regarding credit. mercial banks to fall in line vwi
Rationing of Credit Rationing of credit is a method by which the Reserve Bank seeks to limit the maximum amount of loans and advances, and also in certain cases fix ceiling for specific categories of loans and advances. *RBI also makes credit flow to certain priority or weaker sectors by charging concessional rates of interest. This is at times also referred to as Priority Sector Lending.
Regulation of Consumer Credit Now-a-days, most of the consumer durables like instalment basis financed through bank credit. the purchase of consumer durables is known as x Such credit made available by commercial banks for consumer credit.
Regulation of Consumer Credit If there is excess demand for certain consumer durables leading to their high prices, central bank can reduce consumer credit by doing the following: (a) increasing down payment, and (b) reducing the number of instalments of repayment of such credit. * (b) reducing the number of instalments of
Regulation of Consumer Credit * c) Alternatively, if there is deficient demand for *: o)Alternatively, if there is deficient demand for certain specific commodities causing deflationary situation, central bank can increase consumer credit by: (a) reducing down payment and * (b) increasing the number of instalments of repayment of such credit.