RBI’s Liquidity Management Tools

RBI’s Liquidity Management Tools

• Open Market Operations (OMO):
  • Through OMO, RBI purchases and sells government securities to drain off or infuse liquidity in the banking system. This will result in regulating money supply and hence short-term interest rates.
• Cash Reserve Ratio (CRR):
  • RBI determines the cash holding of banks which increases or decreases, depending on their lending capacity with the change in CRR. Higher CRR reduces liquidity; lower CRR increases liquidity.
• Statutory Liquidity Ratio (SLR):
  • RBI can control the credit growth of the economy through SLR. An increase in SLR reduces liquidity by reducing the amount of credit that banks can create, whereas a decrease in SLR increases liquidity.
• Repo Rate and Reverse Repo Rate:
  • The RBI controls the cost of borrowing and the return on lending by changing the repo and reverse repo rates. Lower repo rates encourage borrowing and increase liquidity, while higher reverse repo rates encourage banks to park surplus funds with the RBI.
• Marginal Standing Facility (MSF):
  • The RBI provides a higher rate than the repo rate for banks to borrow money, and this serves as an emergency liquidity mechanism in case of sudden liquidity shortfalls.
• Currency and Gold Reserve (CGR) Management:
  • The RBI manages foreign exchange reserves, including gold reserves, to manage liquidity in the market.
• Liquidity Adjustment Facility (LAF):
  • LAF is the repo and reverse repo operations that the RBI uses to manage short-term liquidity in the banking system.
• Term Repo and Term Reverse Repo:
  • These are operations that allow banks to manage liquidity over a more extended period and ensure market stability.
• Market Stabilization Scheme (MSS):
  • The RBI issues government securities to absorb excess liquidity from the banking system.
• Targeted Long-Term Repo Operations (TLTRO):
  • Provides long-term funding to banks for specific sectors like MSMEs, NBFCs, and others.

Banking Liquidity Deficit