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Monetary policy

Monetary policy. Monetary policy is the exercise of the central bank’s 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

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Monetary policy

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  1. Monetary policy • Monetary policy is the exercise of the central bank’s control over the money supply as an instrument for achieving the objectives of general economic policy

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

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