Question

How does the Central Bank regulate credit flow by moral suasion?

• A. Refusing further credit to commercial bank
• B. Enhancing CRR
• C. Enhancing bank rate
• D. Issuing directions to commercial bank to cooperate with the general monetary policy of the Central Bank

Answer 1

The correct option is D Issuing directions to commercial bank to cooperate with the general monetary policy of the Central Bank

Moral suasion refers to the persuasion and pressure which central bank exert on the commercial banks in order to follow the directives of its monetary policy. These are generally not ignored by the member banks as it comes directly from the upper authority. The banks are advised to restrict the flow of credit during inflation and be liberal in lending during deflation.