What are the Qualitative Tools of Monetary Policy?

By Mandeep Kumar|Updated : October 11th, 2022

The qualitative tools of monetary policy are credit rationing, consumer credit regulation, guidelines, margin requirements, and ethical persuasion. The implementation of the Reserve Bank of India's quantitative and qualitative (also known as monetary policy) instruments is vital to the development of the country. If the required amount is not readily available in the market, the investment in the economy decreases.

Qualitative Tools of Monetary Policy

On the other hand, if the quantity of money in the economy becomes more than necessary, the poor sector of the economy will suffer as a result of the increase in the cost of necessities. RBI is the only entity that controls the amount of money in the Indian economy. And to manage it, RBI uses quantitative and qualitative tools of monetary policy to achieve economic objectives.

RBI's monetary policy uses qualitative tools for decision-making. These instruments are used to differentiate between different types of credit, for example, favoring significant credit supplies over exports or non-essential credit supplies over imports.

  • This approach affects both lenders and borrowers.
  • The utilization of credit in various industries is affected by these instruments.
  • For example, the RBI may impose upper restrictions on the amount that banks can lend to Special Economic Zones.
  • Money in circulation remains unaffected.

Qualitative Instruments in Monetary Policy

Instruments focusing on chosen economic sectors are considered one of the qualitative measures of monetary policy. Margin requirements, credit rationing, and ethical persuasion are all part of this.

The term "margin requirement" describes the discrepancy between the amount of the loan issued and the present value of the security supplied as collateral for the loan. It is a qualitative approach to credit control used by the central bank to contain inflationary deflation and stabilize the economy.

  • Credit rationing refers to the establishment of credit quotas for certain business operations when there is a need to control the flow of credit, especially for speculative activity in the economy.
  • The central bank uses coercion or persuasion to get the member bank to agree to comply with its orders, which are often followed by member banks.
  • It is advisable that banks limit credit flow during periods of inflation and increase lending during periods of deflation

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FAQs on Qualitative Tools of Monetary Policy

  • Credit rationing, consumer credit regulation, guidelines, margin requirements, and ethical persuasion are the qualitative tools of monetary policy.

  • Open market operation is the most widely used tool of monetary policy. Since open market operations are adaptable, they are the most often utilized monetary policy tool.

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