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1. INTRODUCTORY ECONOMICS - II
CHAPTER :- 1
MONEY AND BANKING
UNNIKRISHNAN V B
ASSISTANT PROFESSOR
DEPARTMENT OF ECONOMICS

2. Introduction
 The word money is derived from Latin word “moneta”
 Money plays an important role in the daily life of a person whether
he is a consumer, a producer, a businessman, an academician ,a political or an administrator.
 Modern economy is described as the “Money Economy”
 Broadly, money includes coins, currency notes, cheques, Bills of exchange etc……..
 Barter system is an old method of exchange system(Before the implementation of money).
It means where goods are exchanged for other goods.

3.  Due to the limitations of barter system money economy is originated (
eliminating the double coincidence of wants , inconvenience and difficulties)
Money:- Meaning and definition
“Money simply represents general purchasing power”
1. “Walker” states that “Money is what money does”.
2. “Geoffrey Crowther” has said “ Money is anything that is generally
acceptable as a means of exchange and that at the same time acts as a measure
and store of value.”
3. “Cole” defines money as “ the purchasing power – something which buys
things”

4. Functions of Money
Money performs lots of functions in an economy. The wide popularity of money helps not only to
remove the difficulties of barter system but also oils the wheels of trade and industry in the present –
day world.
Prof: Kinley the functions of money can be categorized into three heads.
1.Primary Functions 2.Secondary Functions 3.Contingency functions
1.Primary Functions: It is also called fundamental or original functions of money. It include two
functions like (1) Money as a Medium of Exchange and (2) Money as a Measure of value.
(a) Money as a Medium of Exchange:- Money acts as an intermediary in sales and purchases. It
eliminating the double coincidence of wants, inconveniences and difficulties associated with the
barter system

5. (b) Money as a Measure of value:- The values of various commodities
are expressed in terms of money. Money as a measure of value has
made transactions simple and easy. The money value of a good is
called price. Money also serves as a unit of account. For example
in India the unit of account is the Rupee.
II. Secondary Functions :- It is also called “derivative functions”
because they are derived from the primary functions.
(a) Money as a store of value:-
Money as a store of value through time means shifting of
purchasing power from present to the future. Money in this case is
stored as a form of asset.

6. (b) Money as a standard of deferred payments:- Money as a standard
of deferred (future) payments is performing useful functions, enabling the
current and present transactions to be discharged in future.
(c) Money as a transfer of value:- Money as a transfer of values from
person to person and place to place.
III. Contingent functions:- These functions of money include the
following:
(a) Equalization of marginal utilities of spending.
(b)Measurement of national income.
(c) Distribution of national income among various factors of production.
(d) Basics of credit systems.
(e) Liquidity and uniformity of wealth.

7. Other functions
(a) Money helps in the maintenance of the repayment
capacity.(Credit worthiness)
(b) Money represents general purchasing power.
(c) Money provides liquidity to capital
(d) Money helps in making decisions
(e) Money as a basis of adjustment.

8. Inflation and Deflation
The vital goal of any government / Monetary authority like the RBI is
to ensure economic growth and price stability.
Fluctuations in the price levels create disturbances in economic
activities. The two economic evils are
1) Inflation 2)Deflation Price stability
doesn’t mean zero inflation, that is mild inflation ( low inflation of 2%
to 3% ) is essential to boost confidence among the investors.
Target for inflation in India is set at 4% with a band of +/- 2 Percent.

9. Meaning and definition
Inflation means continuous increase in the general price level. Inflation decreases
the value of money. It results in a decline of the purchasing power of the people.
Two essential features of inflation are
(1) the general price level is continuously rising and
(2) the value of money is declining
Inflation occurs when money buys less.
Definitions
1) Coulborn defines inflation as “too much money chasing too few goods”
2) Geoffrey Crowther says that inflation is a “state in which the value of money
is falling, i e ,the prices are rising”

10. According to J M Keynes “ true inflation occurs when the aggregate
demand exceeds the aggregate supply at full employment.”
Types / Classification of inflation
I. Classification on the basis of magnitude:-
a)Creeping inflation :- rise in general price level is very slow like of
a snail or creeper. Increase in general price level is less than 3 %
per annum.
b) Walking or trotting inflation :- When the rise in general price
level is in the intermediate range of 3% to 7% per annum or less
than 10%.

11. c) Running inflation :- Increase in general price level from 10% to
20 % per annum. It affects the poor and middle classes adversely
d) Galloping inflation :- rise in the prices in the range of 20% TO
100% per annum. Latin American countries such as chile, Brazil and
Argentina had experienced galloping inflation. It is also called
“Jumping inflation and “ Hopping inflation.”
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e) Hyper-Inflation :- When price rises very fast at triple digit or
more per annum. It is also called “runway inflation.” Hyper
inflation is a situation when the rate of inflation becomes
immeasurable and absolutely. Eg. Hyper inflation in Germany.

12. II) Classification on the basis of causes.
a) Demand pull inflation:- When demand for goods and service is more than their supply,
their price rise. Such price rise is called demand pull inflation.
b) Cost- push inflation :- If the increase in prices is due to the increase in the cost of
production. Increase in the prices of inputs, it will lead to runway inflation, a situation where
inflation chases inflation.it is very difficult to control. The cost push inflation is the result of the
following two inflations.
1) Wage- push inflation :-It is increase in the costs of production and the resultant
increase in prices is due to increase in wages, it is called wage push inflation. It creates
wage price spiral.
2)Profit push inflation :-
C) Built – in or hangover inflation:-

13. III) Structural inflation:- It is the inflation that arises as a result of
structural rigidities. Some of the structural rigidites are the following.
a) Agricultural Bottleneck:-
b)The government budget constraint : -
c) Foreign exchange constraints : -
IV) Classification on the basis of Coverage:-
a) Comprehensive inflation :- When the prices of all commodities
rise throughout the economy it is know as comprehensive inflation.
It is also called “economy wide inflation.”
b) Sporadic inflation:- When the prices of only few commodities in
few regions{ areas} rise,it is known as sporadic inflation. It is
sectional in nature. Eg, rise in food prices due to bad monsoon.

14. V) Classification on the basis of Government reaction/ degree
of control:-
a) Open inflation:- when govt does not attempt to restrict inflation,
it is called “Open inflation”
b) Suppressed inflation:- when govt prevents price rise through
price controls, rationing, etc it is called as “suppressed inflation.”
Core inflation:- shows price rise in all goods and services excluding
energy and food articles.
Headline inflation:- shows price rise in all goods and services
including energy and food articles.

15. Measurement of inflation in India:-
 In India, we have five different types of price indices. These
are
 1. Wholesale Price Index (WPI)- Calculated by ministry of
industry
 2. Consumer Price Index of Industrial Worker –(CPI-IW)
 3.CPI-AL (Agriculture Labour)
 4. CPI-RW (Rural Worker)
 CPI-UNME (Urban Non-Manual Employee)- Calculated by
central statistical Organization.

16. Wholesale Price Index (WPI)
 Most commonly used price index
 It tracks the price paid by the wholesaler to the producer for a large
basket of commodities, including industrial commodities.
 India changed the base year of calculating WPI – based inflation from
1993-94 to 2004-2005.
 At present 676 commodities are covered under WPI
 This one is prepared by the Department of industrial policy and promotion (
Industrial department)

17. Consumer Price Index (CPI)
 It is used for micro level policy making
 It measures inflation rate at the retail level, that is,
it tracks the price actually paid by the consumer
to the retailers.
 The developed countries are adopted CPI for
measuring inflation and policy purposes. India
generally adopted both WPI and CPI for measuring
inflation.

18. Causes of Inflation
1. Demand side Factors:-
(a)Increase in public expenditure:- Public expenditure will
increase when the nation experienced with higher national
income and rapid population growth. Govt spend more
amount on non developmental activities leads to
increasing the purchasing power of the people, creates
demand for goods and services, but it does nothing in
enhancing supply. This will leads to inflation.

19. (b)Deficit financing
 Deficit financing means financing of budget
deficit ( Public expenditure > public revenue)
by borrowing from the banks or printing of
more currency to revive the economy from
crisis. The main defect of deficit financing is
that it leads to inflationary tendencies in
the country.

20. II. Supply Side Factors:-
 (a) Erratic agriculture growth :- Shortage of food grains leads to
increasing the general price level.
 (b) Agricultural price policy of the government:- The government
declare a policy of price support to farmers like Minimum Support
Price (MSP) in India. This will also leads to increase in the general
price level.
 (c) Inadequate rise in industrial production:- The performance of
industrial sector especially the essential consumer goods sector like
oil, food and manufacturing textiles was disappointing

21. Upward revision of administered prices:-
The government keeps on raising prices
from time to time in order to cover the
losses in the public sector, it leads to
increase the general price level.

22. III. Other factors
 (a) Large scale tax evasion and avoidance.
 (b) Black marketing and hoarding of essential
commodities lead to artificial scarcity.
 (c) Unused capacities in industries.
 (d) High capital – output ratio.
 (e)Shortage of essential raw materials etc….

23. Measures to Check / Combat Inflation
:-
 Four methods
 1) Monetary Measures :- Monetary measures are
applied to check the supply of currency and credit.
These measures include quantitative and
qualitative measures. Monetary policy is the policy
of central bank (RBI).
 Fiscal Measures :- These are measures taken by the
government with regard to taxation, expenditure
and public borrowings. Fiscal policy is the policy of
the government.

24. 3. Control Over Investment:-
 Control over investment is the most common method
to combat inflation. Over investment lead to increase
in inflation rate also.

25. 4.Other Measures :-
Short-term Measures
 A) Public distribution of scarce essential commodities through fair price
shops.
 B) Import Essential commodities
 C) Rationing of essential goods in times of shortage
 D) Attain distributional justice by moving goods from surplus areas to
deficit areas.
 Long –term Measures:-
 A) Boost the domestic production and thereby reduce the
dependence on costly imports from abroad.
 B) Promote the strategy of export promotion and import
substitution.

26. Deflation: Meaning and Implications
 Deflation is just opposite of inflation.
 It refers to a phenomenon of persistent
(continuous) decrease in the general price level,
that is , hikes in the value of money.

 The deflation involves not only fall in price level
but also fall in output, income, and
employment.

27. Disinflation:- It means a reduction in the rate of
inflation.
Reflation:- It is a situation of inflation
deliberately brought by the government to reduce
unemployment and increase demand and there by
ensure higher level of economic growth.
That is, reflation is the policy of RBI to stop the fall
in price levels, but without causing rise in the price
levels (Inflation)

28. Stagflation:- It is a combinations of both
inflation and unemployment.
Chronic Inflation:- Inflation is continues to
increase for a longer period of time, it is called as
Chronic or secular inflation.
Scarcity Inflation:- scarcity inflation
occurs due to hoarding and black marketing. It is
practiced to create an artificial shortage of
essential goods like food grains……

29. Phillips Curve:- It is the graphical
representation of inflation and unemployment.
It was developed by A.W.H Phillips. ‘

30. Role and functions of Commercial
Banks
 Commercial banks play a vital role in the
economic development of a country like India.
Banking in India is truly a reflection of a mixed
economy with public sector banks, private and
foreign banks.
 Commercial banks are an integral part of
financial system of the country.

31. Financial system is a broad concept, comprises
with four major components; namely:
a) Financial institutions (for instance,
RBI,SBI,PNB)
b) Financial market (Money Market and
capital market)
c) Financial instruments (Treasury Bills,
Commercial paper, share, Bonds)
d) Financial services (ATM, Locker
Facilities, M-banking, Mutaul Funds)

32. Bank: Meaning and Definition
The word bank means an institution for keeping,
lending and exchange of money.
The basic function of a bank is to accept money from
the public and lend to others.
On the other hand, a bank is an institution which
deals with money and credit

33. Horace White States, "a bank is an
manufacturer of credit and a machine
for facilitating exchanges”

34. Role/Importance of Commercial
Banks:-
The banking mechanism plays a decisive role in the socio-
economic development of any country.
Sound banking system accelerates the process of
industrialization and agricultural development.
No country can develop without developing the banking
structure of that country.

35. Major importance of commercial banks can be
discussed under the following heads
1.Fostering saving habits of the people:- Banks
provide safety and security to deposits of the public
public confidence among the public.
The depositors will get interest for their deposits.
2.Accelerate the rate of capital formation:-
banking system is able to provide sufficient capital
to the growth of commerce, industry, agriculture
and trade.

36. 3.Financing industry:- banks provide large
varieties of financial support(short-
term,medium-term,long-term, to industry.
IFCI(1948),IDBI(1964),ICICI(1955),ICICI
Bank (1994),SIDBI(1990)SFC,etc….are
some examples for development finance
institutions in India.

37. 4.Facilitate agricultural development:-
Banks assist the farmers by granting loans and
advances to purchase seeds, fertilizers, insecticides,
tractors,farm equipment, etc…Co-operative banks,
Land Development Banks (LDBs-1920),Regional
Rural Banks (RRBs-1975),National Bank for
Agriculture and Rural Development(NABARD-1982),
etc..are some example of agriculture- oriented banks in
India.

38. 5. Promotion of small – scale
industries
Banking system promotes small scale industries in a
number of ways such as financial assistance in the
form of cash credit ,over draft, loans, etc…
Small Industries Development Bank of India (SIDBI-
April 2,1990) and National Small Industries
Corporation Limited (NSIC-1955) are the best
examples for this type of bank in India.

39. 6.Implementation of monetary policy
The monetary policy is the policy of the central bank of
India (RBI). This policy is used to control the problems of
inflation and deflation.
7. Promote international trade
A Vibrant banking system promotes international trade by
offering various services like acceptance of bills of
exchange, issue of letters of credit, collection and
publications of trade information.

40. 8.Generate employment opportunities
A large number of persons are recruited in the banking
sector. Almost all activities of the government lead to
employment generation.
9.Monetization of economy:-
A strong banking network like branch expansion in rural
and semi urban areas coverts the non-monetized sector(
barter system) in to monetized sector.

41. 10.Balanced Development:-
Banking system promote a balanced development of the
economy. It helps to develop backward regions by
transferring surplus funds from the developed regions to
less developed region.

43. Functions of Commercial banks
Commercial banks perform all types banking
functions like accept deposits from the public
and lend money to the needy. These banks
generally lend short term loans to business
men and traders.
The functions of commercial banks can be
classified into two broad categories; namely:
primary and secondary functions

44. 1.Primary Functions:-
The vital functions performed by commercial
banks are known as primary functions. It
consist of following operations :-
(A) Receiving deposits from the public:-
Bank mobilized the funds through deposits and pay
interest to the depositors. By converting these
deposits into loan, bank promote the economic
activities and boost the trade and commerce

45. Types of deposit includes
I.Fixed Deposit/Time Deposit:- It is
generally opened by small investors who do
not want to invest money in risky industrial
securities like shares.
II. Saving Deposit:- It is generally opened
by middle/low income group who save a part
of their income for future needs.

46. III. Current Deposit/Demand
Deposit:- It is generally opened by trading
and industrial concerns.
IV. Recurring Deposit:- This account is
meant for fixed income group, who can
deposit a fixed sum regularly.
(B) Making loans and advances (
lending of money):- Banks grant loans
and advances to industrialists, entrepreneurs,
firms, etc…

47. For their commercial and corporate
operations. Loans and advances are
given to customers against as well as
collateral securities.
Bank loans and advances are
generally given in the following forms:
Loans, Overdraft, Cash credit
Discounting of bills ..etc

48. Loans: A loan is a lump sum advance
given to a borrower. Two types of
loans
1.Term Loans:- Loan is granted on
the basis of time period, it is called
“term loan”. Medium term loan which
ranges between 5 to 7 years and
“Long Term Loan” which meant for
the period exceeds 7 years.

49. 2. Consumer Loans:- These loans are
personal loans made to customer to
purchase durable consumer articles like T.V,
Refrigerators. Automobiles,..etc
Over draft:- Over draft facility is allowed
only to the Current account holders. Here,
a customer can withdraw money over and
above what is standing his current account.

50. (c) Credit Creation:- It is a unique function of a
modern bank. The credit creation is the power of
banks to expand deposits through the
expansion of their loans and advances.
(d) Use of the cheque system and the plastic
card :- Banks smoothen their factions with the help
of cheque system. Cheque can be used for large
transactions instead of money. In modern era of
banking, use of electronic cheque and transacted
cheque are very popular. Plastic cards like VISA
card,Master cards , ATM cards.. are widely used

51. (e) Transfer of funds :- Commercial
banks provide facilities for transferring
funds from one part of the country to
another or from one country to another
country.
II. Secondary Functions:- Commercial
banks perform a number of non banking
services which are called as secondary
functions.

52. These functions are great benefits to the
customers. These are two groups: namely
Agency services and General utility
services
(a) Agency services:- Here, the banking
community as an agent of the customers.
These functions are
i. Collection of credit instruments:- The
banks collect cheques, bills, promissory
notes,..etc on behalf of the customers and
credit the amount in their accounts.

53. ii. Collection of dividends :- The bank
collects dividends (return from the shares)
and interest (return from the debentures) on
behalf of the customers and credit the
amount in their accounts.
iii.Purchase and sale of securities :-
Banks purchase and sell shares, debentures
and government securities on behalf of their
customers.

54. iv. Acts as a trustee or executer :-
They act as executors; trustee and attorney
for the customers will and execute them after
death in accordance with the pre-planned
procedure.
v. Execution of standing orders:- A
customer can instruct the banker to pay
insurance premium, rent and subscription to
certain persons or institutions on certain
orders.

55. vi. Remittance of funds:- The banks
assist the customers to transfer money from
one place to another. Modern Banks are
actively engaged with remittance of funds
domestically and internationally.
Vii. Acting as a representative or
correspondent:- The banks also act as
representatives or correspondence of their
customers and other banks.

56. viii. Deals with foreign exchange:-
The banks buy and sell foreign exchange on
behalf of the customers.
b) General utility function:- Agency
services are exclusively meant for customers,
general utility services are meant for
customers as well as general public. It
includes

57. Safe custody of valuables,
Locker facilities,
Issues of letter of credit,
Travelers cheque,drafts,etc…
Giving investment advisers and
guide lines,
Foreign exchange facilities,
Credit cards and debit cards,
Travelers’ cheques.

58. Central Bank
Central bank, Reserve Bank, or monetary authority is
a public institution that manages a state’s currency,
money supply and interest rates. Central bank is the
apex institution of the monetary segment of the
country. Examples include the European Central
Bank (ECB),the Federal Reserve of the United
States, the People’s bank of China, the Bank of
Japan (BOJ) and the Reserve Bank of India (RBI).

59. One of the main aim of central bank is to control
the problems of inflation and deflation and to
ensure price stability and economic
development.
A.C.L. Day defined “a central bank as an
institution to help control and stabilize the
monetary and banking system.”

60. Reserve Bank of India
The RBI was set up on the basis of the
recommendations of the “Commission on Indian
Currency and Finance” which is also called
“Hilton Young Commission”.
The Reserve Bank of India Act,1934 provide
statutory basis of the functioning of the bank,
which commenced operations on April 1,1935.

61. The Reserve Bank of India (transfer to public
Ownership) Act was passed in 1948. The RBI was
nationalized on 1st January 1949.
The head quarter of RBI is in Mumbai. Sir
Osborne smith was the first Governor of RBI.
Shaktikanta Das is the present Governor of RBI.

62. Functions of Central Bank
Central Bank is the leader of the money market in
India,, guide and it regulates and controls the
banking structure of the country. It also helps to
achieve growth with price stability. The following
are the important functions advocated by M.H.de
Kock

63. A) Regulator of Currency (Central
Bank as a Bank of Issues):- Central
bank is the bank of issue. It has the
monopoly of note issue and maintains a
separate issue Department. Note issued by it
circulate as legal tender money.
In India, RBI adopted “Minimum
Reserve System” of note issue, that is
Rupees 115 crore in gold and Rupees 85
crore in foreign securities.

64. The monopoly of issuing notes vested with
the central bank ensures the following:-
1.Uniformity in the note issued.
2.Brings stability in monetary system.
3.Boost confidence among the public.
4.Control the supply of money.
Rupee one and coin are issued by “ministry
of Finance.”

65. B) Banker, Fiscal Agent and Adviser to
the Government:- As banker to the
government, the central bank keeps the deposits
of the central and state governments and makes
payments on behalf of governments.
As a fiscal agent, the central bank issues
bonds and treasury bills on behalf of the
government. It helps to maintain smooth process
of the government operations.

66. C) Custodian of Cash Reserve of
Commercial Banks:-The Central Bank
acts as a reservoir of the cash reserves of
the commercial banks. The Commercial
Banks have a statutory obligation to keep a
certain percentage of the deposits with the
central bank. Like Cash Reserve ratio(4%),
Statutory Liquidity Ratio.etc….

67. D)Custody and Management of
foreign Exchange (FOREX)Reserves:-
The central bank keeps and manages the foreign
exchange reserves of the country. It is an official
reservoir of gold and foreign currencies.
It also maintains proper balance of payment
and frame policies to stabilize internal as well as
external value of the currency.

68. E)Lender of the last Resort:-The
central Bank provides financial assistance to
commercial banks by rediscounting eligible
bills of exchange.
When commercial bank do not get
loans facilities from any other sources, they
approach the central bank as a last resort.

69. F)Bank of Central Clearance:-
Clearing in the banking system is the process
of setting transactions between banks.
Central Bank helps in settling mutual
indebtness between commercial banks.
The central bank maintains a separate
department known as the “Clearing
Houses”.

70. G)Controller of credit:- The most
important function of the central bank is to
control the credit creation power of
commercial banks and thereby regulate
inflationary and deflationary pressure within
the economy. For this purpose, it adopts both
quantitative and qualitative methods.

71. Monetary Policy and its instruments
Monetary policy is the policy of the central
bank(RBI),generally a central bank controls over the
supply of money in economy in order to maintain
price stability and achieve high economic growth.
It is designed as to maintain the price stability
in the economy.
W.A Shaw defined “a central bank as a bank
which controls credit”

72. Objectives of Credit Control/Monetary Policy
1.To ensure Internal price stability.
2.To stabilize the foreign exchange rate.
3.To control business cycle.
4.To generate employment opportunities.
5.To protect the outflow of gold.

73. Monetary policy Techniques/Methods of Credit Control
Broadly, the central bank adopts two types/methods of
credit control. They are listed below
1.Quantitative or General Methods
2.Qualitative or selective Methods
1.Quantitative or General Methods:- Under the quantitative
credit control methods, the following weapon are usually
employed by the central bank

74. 1.Bank Rate or Discount Rate Policy
Bank rate is the rate at which the central bank re-discounts
the eligible bills or makes advances against approved
securities.
In other words bank rate is the rate of interest
charged by the central bank while providing financial
accommodation/ assistance to commercial banks.
Bank rate is the traditional weapon of credit control.
The present bank rate in India is 6.15%

75. Under inflationary conditions the central bank will
increase or hikes the bank rate. This policy is known
as “dear money policy” or “tight monetary policy”.
In the case of deflation central bank reduces the bank rate.
This policy is known as “cheap money policy” or “cheap
monetary policy”.
2.Cash Reserve Ratio(CRR)/Variable Reserve Ratio
Cash Reserve Ratio implies that a commercial bank is required
to keep a certain portion (%) of its total deposits with Reserve
Bank of India. This portion is called CRR.

76. At present CRR is 4.50 %. CRR is also called Required
Reserve Ratio or Legal Minimum Requirement. It
was first suggested by J M Keynes in his famous book
“Treatise on money”
During the inflationary periods the central bank hike the CRR.
This policy is also called “Credit squeezing policy/Tight
monetary policy”.
But in the case of deflation central bank reduce the
CRR. This action is known as “Credit liberalization
policy”

77. 3.Statutory Liquidity Ratio(SLR)
This ratio implies that a commercial bank needs to keep
a certain portion of its total deposits with its self in the
form of liquid assets, namely cash, gold.
Currently, the SLR rate in India is 18.00%. During the
time of inflation central bank hike the SLR. But in the
case of deflation central bank reduce the SLR.
4. Open Market Operations
Open market Operations involve the purchase and sale
of government securities(Gilt Edged Securities).

78. The central bank purchase securities during
deflation. The Central Bank sells securities
during inflation.
5. Short term credit control methods
(Liquidity Adjustment Facility-LAF)
There are two short term credit control methods.
They are
1.Repo Rate
3. Reverse Repo rate

79. 1.Repo Rate:- Repo rate is the rate at which
commercial banks borrow rupees from RBI is called
repo rate. This is short term credit control method.
The present rate 5.90%.
It was introduced in 1992.
2.Reverse Repo Rate:- Reverse repo rate is the
rate at which the Reserve Bank of India borrows
money from commercial bank is called reverse repo
rate. At present Reverse repo rate is 3.35%.

80. During the period of inflation Central Bank hikes both
repo and reverse repo rates. On the contrary, at the
time of deflation central bank lowers both repo and
reverse repo.
6.Marginal Standing Facility(MSF):-
MSF is a new liquidity adjustment facility window
created by RBI of India in2011. MSF is the rate at which
the banks are able to borrow overnight funds from RBI
AGAINST the approved government securities. S

81. During the period of inflation RBI will raise the
MFS and lower the rate of MSF during the time of
deflation.
Qualitative or selective Credit control Techniques
1.Regulation or variations in margin Requirements:-
Margin refers to the difference between the market value
of the security and the amount of loan sanctioned on the
security.

82. For Example, if the central bank fixes a 10 percent
margin on the value of the security worth Rupees
1000, then the commercial bank can lend only Rupees
900 to the holder of the security and keep Rupees 100
with it.
2. Regulations of Consumer Credit:-
The main aim of this instrument is to regulate the
demand for durable consumer goods like automobiles,
electronic goods, etc…

83. 3.Rationing of credit:- It controls and regulates the
purpose for which credit is sanctioned by commercial
banks. Under this credit rationing the central bank
rations the amount of credit available to each applicant.
4.Moral Suasion:- Moral suasion implies persuasion
and request made by the central bank to the commercial
banks to follow a particular policy while advancing loans
or to restrict giving loans for non-essential activities.

84. 5.Publicity :- Central bank regularly publish
statements of assets and liabilities of commercial
banks for informative to the public.
6. Direct action:- It includes all types of restrictions and
controls imposed on commercial banks by central bank
in relation to lending.
Direct action may be different forms like refusing
rediscounting facilities to certain commercial banks,
imposing penalty etc….