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In the context of monetary policy, which of the following are qualitative tools used by the Reserve Bank of India?
1. Margin requirements
2. Moral suasion
3. Changing the SLR (Statutory Liquidity Ratio)
Select the correct answer using the code given below.
- a)2 only
- b)1 and 2 only
- c)1, 2 and 3
- d)None
Correct answer is option 'B'. Can you explain this answer?
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Most Upvoted Answer
In the context of monetary policy, which of the following are qualitat...
- The RBI controls the money supply in the economy in various ways. The tools used by the Central bank to control money supply can be quantitative or qualitative. Quantitative tools control the extent of money supply by changing the CRR and SLR, or bank rate or open market operations. Hence option 3 is not correct.
- Qualitative tools include persuasion by the Central bank in order to make commercial banks discourage or encourage lending which is done through moral suasion, margin requirement, etc. Hence options 1 and 2 are correct.
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In the context of monetary policy, which of the following are qualitat...
Qualitative tools used by the Reserve Bank of India:
Margin requirements:
- Margin requirements refer to the amount of funds that an investor must have in their account in order to make a purchase. By changing margin requirements, the RBI can influence the amount of credit available in the market.
- This tool helps the RBI control speculative activities in the market by increasing or decreasing the margin requirements as needed.
Moral suasion:
- Moral suasion is a method used by the RBI to communicate its policy intentions to banks and financial institutions.
- It involves persuasion, advice, and informal communication to encourage banks to follow certain guidelines or policies without imposing any legal obligations.
- Through moral suasion, the RBI can influence the lending and investment behavior of banks to achieve its monetary policy objectives.
Changing the SLR (Statutory Liquidity Ratio):
- The SLR is the percentage of deposits that banks are required to maintain in the form of liquid cash, gold, or other securities.
- By changing the SLR, the RBI can control the liquidity in the banking system.
- Increasing the SLR reduces the amount of funds available for lending by banks, thereby tightening the credit supply and vice versa.
In conclusion, margin requirements and moral suasion are qualitative tools used by the Reserve Bank of India to influence the credit flow in the economy. These tools are complementary to quantitative tools like the SLR, which also play a crucial role in regulating the money supply and achieving the RBI's monetary policy objectives.
Margin requirements:
- Margin requirements refer to the amount of funds that an investor must have in their account in order to make a purchase. By changing margin requirements, the RBI can influence the amount of credit available in the market.
- This tool helps the RBI control speculative activities in the market by increasing or decreasing the margin requirements as needed.
Moral suasion:
- Moral suasion is a method used by the RBI to communicate its policy intentions to banks and financial institutions.
- It involves persuasion, advice, and informal communication to encourage banks to follow certain guidelines or policies without imposing any legal obligations.
- Through moral suasion, the RBI can influence the lending and investment behavior of banks to achieve its monetary policy objectives.
Changing the SLR (Statutory Liquidity Ratio):
- The SLR is the percentage of deposits that banks are required to maintain in the form of liquid cash, gold, or other securities.
- By changing the SLR, the RBI can control the liquidity in the banking system.
- Increasing the SLR reduces the amount of funds available for lending by banks, thereby tightening the credit supply and vice versa.
In conclusion, margin requirements and moral suasion are qualitative tools used by the Reserve Bank of India to influence the credit flow in the economy. These tools are complementary to quantitative tools like the SLR, which also play a crucial role in regulating the money supply and achieving the RBI's monetary policy objectives.
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