Qualitative (Selective) Tools of Monetary Policy

Qualitative (selective) tools of monetary policy do not change the total volume of credit; instead, they direct credit toward or away from particular sectors or uses.

• Margin requirements — the RBI can prescribe a higher or lower margin (the portion of the value of a pledged security that a bank may NOT lend against) for loans against particular commodities, discouraging or encouraging lending for that purpose.
• Rationing of credit — the RBI can fix credit ceilings for particular sectors or set limits on how much a bank may lend against certain securities.
• Moral suasion — the RBI persuades banks, through discussion, letters and meetings, to follow a particular credit policy voluntarily, without using any statutory power.
• Direct action — the RBI can refuse to rediscount bills or grant further credit to a bank that does not comply with its directives, or can penalise it.
• Publicity — the RBI publishes reports, data and its own assessment of banking and credit trends, to guide and inform bank behaviour. …