Difference between quantitative and qualitative instruments of monetary policy by the central bank. (Quantitative instruments affect the overall supply of credit whereas qualitative affect the flow and direction of credit.. ? I dont understand) .

Dear Student
The quantitative measures of monetary policy directly affect the supply of credit in the economy as these measures can reduce or increase the amount of funds available with the banks.
The qualitative measures on the other hand, are just suggestive measures not compulsions. These measures just provide a direction to the flow of credit.
Some quantitative measures are as follows:
1. Bank rate/discount rate/rapo rate – It is the rate of interest at which Central Bank lends to commercial banks. Whenever this rapo rate is increased, the commercial banks also raise the interest rates on their loans to the public, thereby decreasing the demand for borrowings and loans and adversely affecting the process of credit creation. A decrease in rapo rate has an opposite effect.
2. Open market operations – These refer to buying and selling of Government securities by Central Bank to influence the money supply in the country. A sale of Government securities reduces the lending ability of commercial banks and vice versa.
3. Cash reserve ratio (CRR) – Every commercial bank has to deposit with RBI, a minimum percentage of its demand and time deposits. Higher the CRR, lesser is the credit generating ability of commercial banks and vice versa.
Some Qualitative measures are as follows:
1. Moral suasion – This refers to written or oral advice given by Central Bank to Commercial banks to restrict or expand credit. During inflation, the commercial banks are advised to restrict the credit availability.
2. Margin requirements – It refers to the difference between the amount of loan granted and the current value of security offered for taking loan. During inflation, the Central Bank raises the limit of margin requirements.
Hope this information clarifies your doubts. Keep posting :-)
Regards

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