The Central Bank acts as a controller of money supply and credit by using the following methods:
(i) Margin requirement A margin refers to the difference between market value of the security offered for loan and the amount of loan offered by the commercial banks. During inflation, supply of credit is reduced by raising the requirement of margin.
During deflation, supply of credit is increased by lowering the requirement of margin. This measure is often used to discourage the flow of credit into specified business activities.
(ii) Moral suasion It refers to moral pressure exercised by the Central Bank on the commercial banks to be restrictive and selective in lending during inflation and to be liberal in lending during deflation. Generally, this measure is used as a selective credit control instrument to channelise the flow of credit to priority areas.