Monetary policy

Monetary policy is the exercise of

the central banks control over the
money supply as an instrument for
achieving the objectives of general
economic policy

Instruments of monetary policy

(credit control)

Quantitative credit control

Control and adjust total quantity or
the volume of deposits created by the
commercial banks

Qualitative credit control

Control credit selectively

Quantitative credit control

Bank rate

Bank rate is the rate, which the central bank

charges for giving loans and accommodation to the
commercial banks
Open market operations
Deliberate purchase and sale of government
securities in the money market by the central bank,
with
the objective of expansion or contraction of
credit and general economic activity

Quantitative credit control

Reserve requirements
In view of safety and liquidity, the commercial banks
are legally required to keep a part of their total
demand and time deposit as reserve. By raising the
reserve ratio to be maintained by every bank, the
central bank can reduce the volume of credit
Cash reserve ratio: Minimum cash reserve which
the banks are required to keep with the central bank
Statutory liquidity ratio: Minimum amount of
liquidity, which the banks are required to keep with
them

Qualitative credit control

Margin requirement
The central bank can order the commercial banks to
lend an amount lower than the volume of a security. A
higher margin used during inflationary situation will
reduce the amount of loan given by the banks.
Rationing of credit
Credit rationing is a method of controlling and
regulating the purpose for which the banks grant credit
Regulation of consumer credit
The central bank can regulate the terms and conditions
under which consumer credit is to be given by the
banks

Qualitative credit control

Differential rate of interest

Under this scheme the central bank fixes up different
rates on interest to be charged by the banks from
different borrowers who borrow for different purposes
Moral suasion
It implies persuasion and request made by the central
bank to commercial banks to follow the general policy
of central bank
Direct action
Direct action refers to all the controls and directions,
which the central bank may enforce on all banks or any
bank in particular concerning lending and investment