What is Meant by Moral Suasion?
Moral suasion refers to an appeal to morality to change or influence behaviour. Moral suasion under economics is defined as the attempt to coerce private economic activity through government exhortation in ways not already defined or dictated by the existing statute law.
The 'moral' element comes from the pressure for 'moral responsibility' to function in a way that aligns with furthering the good of the economy. Moral suasion, in a narrow sense, may sometimes be known as jawboning.
Understanding Moral Suasion
In economics, central banks try to influence the public sentiments and market through persuasive techniques which they are in control of the economy and prepared to act if needed. Sausion mostly involves verbal gestures and indications from central bank minutes picked apart by analysts and journalists.
Sometimes, the attempts by central banks to influence the inflation rate without indulging in open market operations are called "open mouth operations".
Some features of moral suasion are as follows:
- Persuasion act
- Qualitative tool
- Psychological effect
- Personal interaction involved
- An instrument of monetary policy
- Needs cooperation
- Directed by Central bank
There are two types of moral suasion:
"Pure" moral suasion refers to an appeal for altruistic behaviour and is not used often in economic policy.
"Impure" moral suasion is often referred to as "moral suasion" in economics. It is supported by explicit or implicit threats by authorities to provide incentives to adhere to the authorities' commands.
Moral Suasion in India
The Reserve Bank of India (RBI) uses moral suasion as a qualitative instrument of monetary policy, unlike statutory liquidity ratio or cash reserve ratio.
Moral suasion is a request by the RBI to the commercial banks to take specific measures as per the economy's trends. For instance, RBI may direct banks not to give out certain loans. It includes psychological means and informal means of selective credit control.
