Q.“The Reserve Bank of India (RBI) has decided to increase the loan amount to 90% of the security value, from the prior rate of 80%.” In the light of above statement, identify the type of monetary measure exercised by the Reserve Bank of India (RBI) and its likely impacts on the Aggregate Demand of the economy.
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Start your 14-day free trial to unlock the full solution →The RBI is using a qualitative credit control tool (specifically, margin requirements). By raising the loan-to-value ratio from 80% to 90%, it makes borrowing cheaper against collateral, which increases the money supply and raises Aggregate Demand.
The Concept: Why Margin Requirements Matter
The Reserve Bank of India has two broad baskets of monetary policy tools: quantitative (affecting the overall volume of money, like repo rate or CRR) and qualitative (directing the flow of credit to specific sectors). The statement you’ve quoted is a textbook example of a qualitative tool — specifically, margin requirements.
Here’s the logic. When you pledge a security (say, shares or gold) to a bank for a loan, the bank does not lend you the full market value of that security. It lends only a percentage — that percentage is the loan-to-value ratio. The rest (the difference between 100% and that percentage) is the margin. So, if the loan-to-value ratio is 80%, the margin is 20%. The RBI can raise or lower this margin to make borrowing easier or harder.
In your statement, the RBI has increased the loan amount from 80% to 90% of the security’s value. That means the margin has been reduced from 20% to 10%. This is an expansionary move — it makes credit cheaper and more accessible for borrowers who have collateral.
A common mistake is to confuse this with a bank rate or repo rate change. Those are quantitative tools that affect the cost of borrowing for banks themselves. Margin requirements directly affect the availability of credit to the public, not its price.
The Impact on Aggregate Demand
Aggregate Demand (AD) is the total demand for goods and services in the economy — consumption (C), investment (I), government spending (G), and net exports (NX). The RBI’s move primarily affects consumption and investment.
When the loan-to-value ratio rises from 80% to 90%, a borrower who previously could get ₹80,000 against a ₹1,00,000 security can now get ₹90,000. This extra ₹10,000 is additional purchasing power. More people will be able to take loans, and those already borrowing can borrow more. This directly increases the money supply in the hands of the public.
Change in loan amount per unit of security = New loan amount − Old loan amount
= (90% of security value) − (80% of security value)
= 10% of security value
This extra liquidity flows into the economy. Households may spend more on durable goods (cars, appliances) or housing — boosting consumption. Firms may borrow more to expand capacity, buy machinery, or build inventory — boosting investment. Both components push Aggregate Demand upward. …
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