Question

List and describe the quantitively measures of RBI in managing liquidity in the economy.

Answer 1

>> RBI takes following neasures to managing liquidity :

1) Cash Reserve Ratio:

>> Here banks needs to maintain minimum percentage of their total deposits with RBI. An increase in CRR leads to reduction in liquid deposits and decrease in CRR will lead to increase in liquidity.

2) Statutory Liquidity Ratio:

>> Here banks are required to maintain minimum percentage of their total deposits as liquid assests like cash, gold, marketable securities etc.

3) Open market Operations:

>> Here RBI buy and sell Government securities in open market. When RBI buys government securities, liquidity of banks are increased and when RBI sell liquidity reduce.

4) Liquidity Adjsutment Policy:

>> Here RBI use two tools to maintain liquidity:

a) Repo rate:

It is rate at which RBI provides liquidity to banks.

b) Reverse repo rate:

It is a rate at which RBI absorb liquidity form Banks

5) Bank rates policy:

>> Bank rates are the rates at which RBI lends money to banks. So, when It increased, banks are discouraged totake loans from RBI as they need to pay more interest now. Also bank increase rate on the loans that they have provided. This will discourage the customer to take loans and this how liquidity managed. The opposite happens when rates are decreased.

6) Marginal Standing Facility:

>> Under this policy banks can borrow additional funds from RBI on overnight basis upto certain limits of their SLR at an interest rate (Pinal interest rate over repo rate).