Banking Law MCQ Free PDF Objective Question Answer for Banking Law Quiz Download Now!

lending rate

• In a situation of deficient demand leading to deflation, Reverse repo rate is decreased, it discourages the commercial bank to park their funds with the central bank. It increases the lending capability of commercial banks, which controls deficient demand. Therefore, option 2 – Moral suasion is a qualitative tool used by RBI to control money supply – is the correct answer.

However, this was preferable to taking direct action using government funds and taxpayers’ money. The implementation of RBI’s Quantitative and Qualitative instruments plays an important role in the development of the country. If the required money supply for the economy is not available in the market, it leads to a decline in investment in the economy. On the other hand, if the money supply in the economy is more than what is required, then the poor section of the economy will suffer because the price of essential commodities will rise. Can increase or decrease liquidity in the economy to control money supply.

Free cash flow is the cash that remains after a company pays for its operations and makes any capital expenditures.Capital expenditures are purchases of physical assets such as property and equipment. Net income is linked to, but not the same as, free cash flow. Net income is typically used to assess a company’s profitability.

In other words, it refers to the aggregate stock of money. Moral suasion is a qualitative tool used by RBI to control money supply. Within months of a small cooperative bank fallout in India, major private player Yes Bank (India’s fifth largest private sector bank) has also come under the RBI action for mounting bad loans.

Non-negotiable – Meaning in Business and Finance

And there is no option where are given simultaneously. Whenever you face such multiple statement type MCQs, always use “elimination method”. First find a statement that is definitely right or definitely wrong and eliminate choices accordingly. Prices of all goods and services are increasing day by day.

Companies utilize this statistic either to develop their businesses or to maintain acceptable levels of free cash flow. Any changes in SLR and CRR bring out the change in the position of commercial banks. From the discussion so far, you might think why Rajan only focuses on Repo rate to control money supply. Rajan is not the main or even prominent money supplier for these banks. Whatever Rajan does, its effect will be felt only after 6-8 months but by that time, new factors would cause another rise in inflation and Rajan will have to start from scratch again. But, In advanced economies, like USA, people don’t invest large portion their income in savings account or FD.

So, for those American banks, their own Central bank is a significant money supplier. Nowadays, RBI uses LAF Repo rate as the main tool, to control money supply. Bank rate is not the main tool to control money supply these days. Does Mohan just callup Rajan and demand 1 lakh crores?

moral suasion meaning in banking and traders get credit from commercial bank against the security of their goods. Bank never gives credit equal to the full value of the security. • Since all banks have their accounts with the central bank, the central bank can easily settle the claims of various banks against each other simply by book entries of transfers from and to their accounts. Although neither a necessary nor a sufficient condition, a low level of competition by suppliers in the economy contributes to the increased effectiveness of moral suasion. The use of moral suasion in environment regulation is making polluters feel responsible for the negative externalities that they cause.

Examples of suasion

Jawboning is becoming increasingly prevalent as many central banks, after years of low interest rates and aggressive monetary policy, have fewer alternative tools left to boost the economy. The moral suasion develops a more psychological effect as the central bank makes an appeal to the bank’s nationalism spirit. Thus we can say that the moral suasion is a psychological phenomenon of controlling the credit in the economy.

A theory of fiscal dominance in India – BusinessLine

A theory of fiscal dominance in India.

Posted: Sun, 02 Aug 2020 07:00:00 GMT [source]

Federal Reserve regulations are rules put in place by the Federal Reserve Board to regulate the practices of banking and lending institutions, usually in response to laws enacted by the Congress. Most of this moral suasion involves verbal gestures and signalling through central bank minutes that can be picked apart by analysts and journalists. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

New Business Terms

A central bank may use tactics of moral suasion in public or private, especially when it finds itself unable to enact a certain policy measure or prefers to not take explicit action. M2 is a measurement of the nation’s money supply that estimates all of the cash that everyone has in hand or in short-term bank deposits. After demonetization in India on Nov 8, 2017, the governor advised the banks to be lenient with the farmers at the time currency exchange and ensure even flow of money in rural areas.

  • The ratio of the liquid assets to time and demand liquidities is termed as SLR which is 22.5% at present.
  • Greenspan chose to use suasion instead of some other direct intervention.
  • Let us assume that the entire commercial banking system is one unit.
  • First find a statement that is definitely right or definitely wrong and eliminate choices accordingly.

There are certain factors that affect OMOwhich include underdeveloped securities market, excess reserves with the commercial banks, indebtedness of the commercial banks, etc. To maintain liquidity and to control credit in the economy, the RBI also keeps a certain amount of cash reserves. The quantitative instruments are also known as general tools used by the RBI . As the name suggests, these instruments are related to the quantity and volume of the money. These instruments are designed to control the total volume/money of the bank credit in the economy. These instruments are indirect in their nature and are used to influence the quantity of credit in the economy.

• It represents the government in the international financial institutions (such as World Bank, International Monetary Fund, etc.) and conferences. • It supplies foreign exchange to the government for repaying external debt or making other payments. • It receives deposits from the government and collects cheques and drafts deposited in the government account.

The other options, namely bank rate, open market operations, and cash reserve ratio, are quantitative tools used by RBI to control money supply. Even if the central bank has minimal control over the market in terms of monetary policy instruments, it must still persuade the market otherwise. If the market believes a central bank is not in control of the economy, it may lead to a dollar run and a financial catastrophe. Using moral suasion tactics, a central bank persuades the public of its intent – and capacity – to promote future economic recovery.

For this purpose, they accept cash in demand deposits and advance loans on credit to customers. According to R.S.Sayers, “Banks are not merely purveyors of money but also manufacturer of money”. Monetary policy’s quantitative and qualitative methods aim to accelerate growth and stability by controlling the credit supply in the economy. Both the quantitative and qualitative instruments have their own merits and demerits, but both of the instruments are important for the economic stability and price stability in the economy. Both these methods are effective and efficient to control inflation and deflation due to the movement of the money supply in the economy.

Best of the Web Today: The Limits of Moral Suasion – Wall Street Journal (India)

Best of the Web Today: The Limits of Moral Suasion.

Posted: Tue, 12 Mar 2013 07:00:00 GMT [source]

Conventional monetary policy instruments were increasingly difficult to utilize. Therefore, the Fed sought to persuade markets of its determination to support a durable economic recovery. However, they used words and suasion rather than direct actions. Moral suasion is the act of using verbal arguments, appeals, and persuasion to influence a person or group of people to change their behavior. This is in contrast to using overt coercion or physical force. In other words, moral suasion uses diplomatic verbal strategies rather than force or coercion to persuade individuals to behave in a specific way.

Qualitative Tools

In recent years the Fed has made a concerted effort to engage more with the public, which could be seen as an effort to increase transparency—or to leverage its power of moral suasion. The major types of loans and advances are Overdraft, Cash Credit, Loans and Discounting of Bills of Exchange. The government took over IL&FS in 2018 in an effort to reassure creditors after the defaults. Also, in 2019, the RBI seized control of another struggling shadow lender, Dewan Housing Finance Corp., to initiate bankruptcy proceedings.

Nigeria: What does the interest rate cut mean as the country enters recession – The Africa Report

Nigeria: What does the interest rate cut mean as the country enters recession.

Posted: Mon, 28 Sep 2020 07:00:00 GMT [source]

We already know how to apply SLR, CRR and OMO to fight inflation (and deflation.) let me paste the table again. Ultimately shopkeeper will bring down the prices to attract people into buying more things. Because We know that statement 1 is definitely correct.

In politics, https://1investing.in/ has frequently been employed by movements for social change, but its effectiveness has varied widely. “Impure” moral suasion, which is the usual meaning of “moral suasion” in economics, is backed by explicit or implicit threats by authorities to provide incentives to comply with the authorities’ wishes. “Pure” moral suasion is an appeal for altruistic behaviour and is rarely used in economic policy. ClearTax offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India.


Thus, the Fed resorted to coordinating a bailout package for the company. They succeeded in creating the impression that the company was too big to fail, and in the end, around 14 banks bailed out the company for $3.6 billion. In 2012 European Central Bank president Mario Draghi said the bank would do “whatever it takes” to preserve the euro, which served to underpin the beleaguered currency and led to its subsequent rebound. A famous example of the use of moral suasion is the New York Federal Reserve’s intervention in the bailout of Long-Term Capital Management in 1998.

The RBI can issue directives, guidelines, suggestions for commercial banks regarding reducing credit supply for speculative purposes under the moral suasion. • In a situation of deficient demand leading to deflation, central bank decreases marginal requirements. This encourages borrowing because it makes people get more credit against their securities. Moral suasion has been effectively used in the management of inflation in a number of countries and is also referred to as “open mouth operations” in the financial sector. The common factor for the success of moral suasion is the trust that stakeholders have on the central bank. For example, New Zealand has experienced high inflation in the early-to-mid-1980s, but it drastically reduced as the bank managed to anchor stakeholder inflation expectation by moral suasion.


RBI fixes a credit amount to be granted for commercial banks. Credit is given by limiting the amount available for each commercial bank. For certain purposes, the upper credit limit can be fixed, and banks have to stick to that limit.