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Monetary Policy Is How Central Bank Manages Money Supply to Attain the Objective of Its Monetary Policy

Autor:   •  February 24, 2018  •  1,316 Words (6 Pages)  •  139 Views

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- Fixing Margin Requirements

The margin refers to the "proportion of the loan amount which is not financed by the bank". A change in a margin implies a change in the loan size. This method is used to encourage credit supply for the needy sector and discourage it for other non-necessary sectors. This can be done by increasing margin for the non-necessary sectors and by reducing it for other needy sectors.

- Consumer Credit Regulation

Consumer credit supply is regulated through hire-purchased and installment sale of consumer goods. Under this method the down payment, installment amount, loan duration, etc. is fixed in advance. This can help in checking the credit use and then inflation in a country.

- Publicity

This is the method of selective credit control. Through it Central Bank 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. Through its weekly and monthly bulletins, the information is made public and banks can use it for attaining goals of monetary policy.

- Credit Rationing

Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount available for each commercial bank. This method controls even bill rediscounting. For certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit. This can help in lowering banks credit exposure to unwanted sectors.

- Moral Suasion

It implies to pressure exerted by the central bank on the banking system without any strict action for compliance of the rules. It helps in restraining credit during inflationary periods. Commercial banks are informed about the expectations of the central bank through a monetary policy. Under moral suasion central banks can issue directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes.

- Control Through Directives

Under this method the central bank issue frequent directives to commercial banks. These directives guide commercial banks in framing their lending policy. Through a directive the central bank can influence credit structures, supply of credit to certain limit for a specific purpose. The central bank issues directives to commercial banks for not lending loans to speculative sector such as securities, etc. beyond a certain limit.

- Direct Action

Under this method the central bank can impose an action against a bank and it can also put a ban on a particular bank if it dose not follow its directives and work against the objectives of the monetary policy.

"Instruments of Monetary Policy - Quantitative & Qualitative Tools." Instruments of Monetary Policy - Quantitative & Qualitative Tools. Web. 24 Oct. 2015.

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