Distinguish between the Quantitative and Qualitative Instrument of Monetary Policy.

The Reserve Bank of India uses various instruments for regulating money supply, interest rates etc., in the system. These instruments an be qualitative or quantitative in nature. Whereas, quantitative instruments influence the volume of Money and credit supply in the system, the qualitative instruments regulate credit supply in certain selective sectors (directions) of the economy.

Quantitative measures include variations in reserve requirements, changes in bank rate and Open Market Operations (OMO). The Variations in margin requirements, moral suasion, ceilings on credit and discriminatory rates of interests are qualitative measures. The qualitative instruments of monetary policy have been explained below:

Credit Ceiling: The Reserve Bank imposes ceilings on credit flow in certain sectors to ensure equitable supply in other sectors of the economy.

Variations in Margin Requirements: When lending against a collateral or security (in form of property, shares, gold etc.) the commercial banks retain a certain margin percentage as a hedge against market fluctuations. The percentage of minimum margin is decided by RBI, and used as an instrument in credit regulation. If the minimum margin is higher, less credit is extended and this discourages credit extension/borrowing.

Discriminatory Rates of Interests: The Central Bank empowers the commercial banks to extend credit to different sectors at differential rate of interest, with priority on loans at lower rates.

Moral Suasion: The Central Bank persuades commercial banks to expand/restrict credit in line with the credit policy by appealing in written or oral. It is considered as a psychological device to selectively encourage/ discourage industrial lending. However, these policies are persuasive in nature and cannot be enforced.