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