Qualitative Tools of Monetary Policy :Fixing Margin,Publicity,Credit Rationing,Moral Suasion,Direct Action,FORWARD GUIDANCE

 

                           

Qualitative Measure of the RBI:

• Tools which define the direction of credit in the economy ie where the money will be channelized in the economy as per the requirement of the economy.
• Most of the measures are of advisory nature rather than mandate or compulsion to be followed by the bank.
• The objective is to encourage credit supply for the needy sector and discourage it for other non-necessary sectors.

Fixing Margin Requirements:

• It is that part of a loan which a borrower has to raise at its own in order to get finance for any purpose. 
• This portion of the loan is not financed by the bank.
• A change in a margin implies a change in the loan size. 
• Increasing margin for the non-necessary sectors will reduce the allocation of funds by banks to that particular sector .
• Example, If the RBI feels that less credit supply should be allocated to Real Estate sector, then it will increase the margin. 
• Reducing margin for the necessary sectors will increase the allocation of funds by banks to that particular sector. 
• Example, If the RBI feels that more credit supply should be allocated to agriculture sector, then it will reduce the margin and even 85-90 percent loan can be given. 
• Apart from this,margin money ensures motivation of the investor as certain amount of his money is also invested.

Publicity:

• The Central Bank (RBI) publishes various reports stating what is good and what is bad in the system. 
• This published information can help commercial banks to direct credit supply in the desired sectors.

Credit Rationing: 

• Central Bank fixes credit amount to be granted / rationed by limiting the amount available for sectors in the form of loans by commercial bank. 
• It  helps in lowering banks credit exposure to unwanted sectors.
• Ex. Rationing of credit during demonetization and Targeted Long term REPO operation (TLTRO)

Moral Suasion / Control Through Directives:

• Directives, Guidelines and  Suggestions issued by the RBI to persuade the Indian banking system 
• These are in the form of advisory without any strict action for non-compliance of the rules. 

Direct Action:

If certain banks are not adhering to the RBI’s directives, the RBI can impose an action against a bank. 

FORWARD GUIDANCE:

• Communication from central banks to the public about the state of the economy and likely future course of the monetary policy. 
• It influences the financial decisions of households, businesses and investors by providing guidance for the expected path of interest rates.
• Forward guidance attempts to prevent surprises that might disrupt the markets and cause significant fluctuations in asset prices.