Long-Term Liquidity and Short Term Liquidity

Bankers Seek RBI for Long-Term Liquidity in Tight Money Market Conditions. Bankers seek long-term liquidity injections for 30, 90, and 120 days.

• Instruments Proposed
  • Instruments proposed include OMO, VRR Auctions, and Buy/Sell Swaps.
• Short Term Liquidity
  • RBI provided short-term liquidity through 14-day, 4-day, and overnight funding facilities.
  • Short-term liquidity: A bank’s ability to pay off short-term liabilities, such as accounts payable, that are due within a year. 
• Long Term liquidity
  • A bank’s ability to meet long-term debts and continue operating into the future. 

The Reserve Bank of India (RBI) provides short-term and long-term liquidity to banks through a variety of tools and operations

• Repo rate:
  • The RBI lends short-term money to banks against securities at the repo rate. The RBI adjusts the repo rate to manage short-term liquidity and influence the amount of money banks can lend.
• Variable Rate Repo (VRR)
  • A variable rate repo (VRR) auction is a tool used by the Reserve Bank of India (RBI) to inject liquidity into the banking system and help banks overcome liquidity shortages. VRR auctions are also known as term repo rate auctions.
• Liquidity adjustment facility (LAF):
  • The RBI applies LAF for maintaining the call rates within the corridor created by the repo rate and the reverse repo rate.
• Marginal standing facility (MSF):
  • The RBI offers short-term liquidity using MSF.
• Term loan for banks (TLTRO):
  • The RBI extends long-term credit to the banks under TLTRO. The banks give government securities as collateral for the amount of money drawn under TLTRO.
• Open Market Operations (OMO):
  • The RBI is injecting or absorbing liquidity through outright purchases or sale of government paper.
• Long term FX swap auction:
  • The RBI uses long term FX swap auction to add on or withdraw the liquidity.
• Term repo/reverse repo:
  • On a 14-day variable rate-term repo/reverse repo, it absorbs frictional liquidity requirement for the banking system
• Other factors include:
  • Cash balances the government holds in RBI
  • Differences in circulating currency
  • Alterations in cash reserve ratio of CRR and SLR respectively

RBI’s Liquidity Management Tools