Liquidity Management in the System
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Central Banking (Elective) — CAIIB.
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Free sample — 8 of 66 rapid-fire Q&A cards.
What is the primary objective of the Reserve Bank of India's liquidity management framework?
The RBI's liquidity management objective is to ensure adequate liquidity in the system to meet credit growth and support investment demand in the economy, while keeping inflation under check and maintaining financial stability.
What does a positive Banking Sector Liquidity (BSL) value indicate about system liquidity?
It indicates the banking system is in liquidity deficit.
Which policy rate does the RBI use as its primary instrument to signal the monetary policy stance?
The repo rate is the RBI's key policy rate, signalling the monetary policy stance and anchoring the short-term money market rates around it.
How is Banking Sector Liquidity (BSL) calculated using the standard formula?
BSL equals NBLAF minus Excess Reserves (ER).
What is the Liquidity Adjustment Facility (LAF) corridor, and what defines its upper and lower bounds?
The LAF corridor is the band formed between the Marginal Standing Facility (MSF) rate at the upper end and the Standing Deposit Facility (SDF) rate at the lower end, with the repo rate as the policy rate in the middle.
What does NBLAF stand for in the context of BSL formula?
Net Borrowings under Liquidity Adjustment Facility from RBI.
What is the Standing Deposit Facility (SDF), and how does it differ from the earlier fixed-rate reverse repo?
The SDF is a floor instrument introduced in April 2022 that allows banks to park surplus funds with the RBI without collateral, replacing the fixed-rate reverse repo as the lower bound of the LAF corridor.
When was the Interim Liquidity Adjustment Facility (ILAF) introduced by RBI?
ILAF was introduced in April 1999.
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