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BANKING AND MONETARY POLICY — Economics STD 12 Commerce — Question

Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsBANKING AND MONETARY POLICY5 Marks
Question
Explain in detail $RBl's$ Qualitative measures of monetary policy.
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Answer

$1.$ Introduction:
  • In monetary policy how much monetary expenditure is done for which activity for that which sources are available and matter related to quantity of money are included.
  • Most of the economist think monetary policy responsible for inflation and deflation.
$2.$ Meaning of Monetary Policy:
  • Monetary policy involves the influence on the level and composition of aggregate demand by the manipulation of interest rates and availability of credit.
  • It is essential in an economy maintain balance, management and control the between monetary demand and supply.
  • Such policy to is called monetary policy.
  • If there is imbalance in aggregate demand and supply in an economy than inflation or deflation takes place in an economy.
  • By this, international currency is also affected.
  • Monetary policy is an instrument which is use for special purpose.
  • Main purpose of Monetary policy is to change in aggregate demand, circulate of monetary supply and to maintain stability.
  • In general sense, to control money and maintain interest rate that is called monetary policy.
  • Monetary policy is also called Stabilization Policy.
  • $\text{RBI}$ is the Apex Bank.
  • It forms the monetary policy for economic development.
  • "For fulfillment of particular goal, $\text{RBI}$ fixed certain policy regarding monetary demand and interest rate that policy is called monetary policy.
  • It main objective in economic development, price stability, stability in exchange rate, etc.
  • To fulfill the above goals, they form qualitative and quantitative instruments, Monetary Policy constitutes the conscious steps taken by the monetary authority which bring about changes in the stock of money, source/generation of money and cost of money.
  • The policy which entrusts various tools of regulating supply of money in the hands of the apex bank with the purpose of achieving general economic objectives is called monetary policy.
  • In short, the policy undertaken by the apex bank for regulating the supply of money in order to maintain economic stability for the process of economic development and interest of the public is called monetary policy.
$3.$ Qualitative Measures of Monetary Policy:
  • Quantitative instruments of monetary policy by $\text{RBI}$ used to control the amount of bank credit.
  • By such instruments without the developmental credit, control the speculative credit, stability and development can be achieved.
  • Qualitative instruments are used in many different fields.
  • Quantitative instrument has same credit effect on all sectors while Qualitative instruments have unique impact on some sectors and are not meant to impact all sectors.
  • Similarly, following are the qualitative instruments of monetary policy:
$(1)$ Security Requirement:
  • Commercial bank is an institution working for the purpose of profit They lend money as a loan to general public and ensure that public returns the loans given to them.
  • Banks lend money against some security deposits from the borrower.
  • In case, the borrower is not able to repay the loan, the bank uses the security to recover its dues.
  • For example, a bank can take property in the form of house, gold, land, car, deposits, etc. as security.
  • If the individual is unable to pay the loan banks sells the property and recovers its dues.
  • Anyone can get the loans from banks.
  • I.e. A poor farmer or a rich industrialist.
  • But security specifications are different with the bank for loan.
  • E.g. Poor farmer may be granted a loan without much security and big business man will be granted a loan on more security.
$(2)$ Margin Requirement:
  • In general sense, a margin is different between the amount of loans and the market value of the security offered by the borrower.
  • This percentage of amount use as a credit is called margin.
  • There are different types of margin set for all sections of society.
  • Central bank uses this instrument to control inflation.
  • Commercial banks keep more margin, so that credit decreases. During deflation, commercial bank decreases the margin.
$(3)$ Ceiling of Credit $($Credit Rationing$):$
  • $\text{RBI}$ prescribes ceilings for credit for different purposes which are us under.
  • There are two types of credit rationing.
  • $(1)$ Quantitative rationing the purpose of, the amount of credit to be given that way ceiling of credit is decided.
  • $(2)$ Qualitative rationing in this banks are given instruments on which goods should be substituted for credit and which should not be substituted.
  • During inflation, the ceiling of credit is entered.
$(4)$ Discriminatory Interest Rate:
  • Reserve Bank suggest differential rates of interest for different types of lendings to commercial bank keeping in view the concept of economic development.
  • This is called Discriminatory or differential interest rate policy.
  • E.g. A relatively lower rate of interest is charged from needy farmers and higher rate of interest is charged from rich person on luxurious goods like Bungalow, Car, etc.
$(5)$ Others:
  • Seeing the economical position of the country what amount of credit is to be given or not that is decided by the monetary institution representatives.
  • The central bank frequently; announces its policy and urges the commercial banks to adopt it.
  • If they do not follow the guidelines of $\text{RBI}$ then $\text{RBI}$ can take direct action against such bank.
  • By that discounting facilities of bank is removed or penalty of interest is collected on loans and advances.

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