CONTROL OF MONEY SUPPLY BY RBI (PART 3) : MARGIN REQUIREMENT, RATIONING OF CREDIT & MORAL SUASION

There are certain sectors in an economy which act as principal source of instability in the economy.

QUALITATIVE INSTRUMENTS OF CREDIT CONTROL are used by RBI to solve the problems of these select sectors by increasing or decreasing the supply of money.

MARGIN REQUIREMENT

It refers to the difference between the current value of collaterals offered for loans and the actual values of loan granted.

- Rise in Margin Requirement controls the problem of inflation

- Fall in Margin Requirement controls the problem of deflation

RATIONING OF CREDIT

It refers to fixation of credit quota (limit) for different business activities.

The commercial banks cannot exceed the quota limits (fixed by RBI for different business activities ) while granting loans

- Introduction of Credit Rationing controls inflation

- Withdrawal of Credit Rationing controls deflation

MORAL SUASION

It is like advice given to commercial banks by the RBI by combining measures of both PERSUASION and PRESSURE.

- The banks are advised to restrict loans during inflation

- The banks are advised to be liberal in lending loans during deflalton