Qualitiative tools of monetary policy

What is the difference between qualitiative tools of monetary policy and quantitative tools of monetary policy?

Quantitative tools controls the quantity of money supply whereas qualitative tools decides which sector gets how much money.

For example, let’s say you have 1000 crore. Qualitative tools determine how much of it will be given to MSMEs , Agriculture and Roads.

Basically kispe kitna jayega!

What are the qualitatitve tools?

Rationing of credit.

Direct Action.

Moral suasion

Change in margin requirement on security loans.

What is the meaning of rationing of credit?

It aims to control the purpose for which the credit is granted for commercial banks.

-It controls the allocation of finance to different sectors.

For example, while buying grocery you decide what to buy and how much to buy, similarly rationing of credit takes care of allocation of credit to different sectors.

Define direct action.

Many mandatory things are supposed to be maintained by the commercial banks.

For example there is a thresold for non-performing assets that is to be maintained by the commercial banks.

If these mandatory things are not maintained by the commercial banks then the central banks take over.

For example, if the commercial banks do not maintain NPA then central banks take prompt corrective action against them.

I will have to understand better.

Is there any such mechanism for co-operative banks?

Define moral suasion.

It refers to the act of persuading or convincing the commercial banks to implement the policies set by the central banks.

For example if the government lowers the repo rate, and that decrease in interest is not reflected in the loans that these commercial banks lend, then the central bank can issue a letter, in an attempt to persuade the commercial bank to do the same.

Repo rate kam hua lekin commercial bank ka interest rate abhi bhi kam nahi hua. Toh abhi moral suasion kar sakta he central banks.

Define change in margin requirement of security loans. How does RBI control the liquidity through this?

It refers to the percentage of the total worth of the property given during loan for safety purpose that the commercial bank maintains.

If the RBI feels that liquidity has to be decreased then it can increase margin requirement of security loans.

Let’s say that MR was 4 percent. So if the value of the asset given by commercial bank is 1 crore, then 4 lakhs had to be kept with RBI. Now, if by doing some mumbo jumbo, RBI raises that to 7 percent, then extra 3 lakhs would have to be kept with RBI. So money in circulation decreases isn’t it?

What is monetary policy transmission?

See, let’s say that the cash reserve ratio is really less.

It means that the banks have more money to lend loans. So, less cash reserve ratio allows the banks to spend more on credit.

And interestingly if repo rate decreases, commercial banks will take more loans. And more and more people will take loans from commercial banks as their rate of interest would also have decreased. More money would be spent on things like car and house etc. This would increase consumptiom. Increase in consumption, in turn will increase the demand. This will further lead companies to invest more in producing more. More output will be there and this would result in growth.

Repo rate decreases-COM bank take loans-People take loans-More consumption-More demand-More investment-More output and more growth.

What are the reasons behind weak transmission of monetary policy in India?

Health of banking sector.

If the decrease in interest rate, of say, repo rate is not transmitted to the interest at which commercial banks lend loan, then it poses a problem for transmission.

Final inclusion

Not having money deposited in the banks.

Competition from other financial saving instruments like provident fund and national saving certificate.