Transcript Instruments of monetary policy (credit control)

Monetary policy

Monetary policy is the exercise of
the central bank’s control over the
money supply as an instrument for
achieving the objectives of general
economic policy
Instruments of monetary policy
(credit control)

Quantitative credit control
Control and adjust total quantity or
the volume of deposits created by the
commercial banks

Qualitative credit control
Control credit selectively
Quantitative credit control

Bank rate

Bank rate is the rate, which the central bank
charges for giving loans and accommodation to the
commercial banks
Open market operations
Deliberate purchase and sale of government
securities in the money market by the central bank,
with
the objective of expansion or contraction of
credit and general economic activity
Quantitative credit control

Reserve requirements
In view of safety and liquidity, the commercial
banks are legally required to keep a part of their
total demand and time deposit as reserve. By
raising the reserve ratio to be maintained by every
bank, the central bank can reduce the volume of
credit
Cash reserve ratio: Minimum cash reserve which
the banks are required to keep with the central
bank
Statutory liquidity ratio: Minimum amount of
liquidity, which the banks are required to keep with
them
Qualitative credit control



Margin requirement
The central bank can order the commercial banks to
lend an amount lower than the volume of a security.
A higher margin used during inflationary situation
will reduce the amount of loan given by the banks.
Rationing of credit
Credit rationing is a method of controlling and
regulating the purpose for which the banks grant
credit
Regulation of consumer credit
The central bank can regulate the terms and
conditions under which consumer credit is to be
given by the banks
Qualitative credit control



Differential rate of interest
Under this scheme the central bank fixes up different
rates on interest to be charged by the banks from
different borrowers who borrow for different purposes
Moral suasion
It implies persuasion and request made by the central
bank to commercial banks to follow the general policy
of central bank
Direct action
Direct action refers to all the controls and directions,
which the central bank may enforce on all banks or any
bank in particular concerning lending and investment