LIQUIDITY MANAGEMENT IN THE SYSTEM
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Central Banking (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What is the primary objective of liquidity management by the Reserve Bank of India?
The primary objective is to ensure adequate liquidity in the banking system to support credit growth and economic activity while maintaining monetary stability and keeping short-term interest rates close to the policy repo rate.
What is the primary tool RBI uses to inject liquidity into the banking system on an overnight basis?
Repo under LAF is the primary overnight liquidity injection tool.
What is the Liquidity Adjustment Facility (LAF) and what is its key purpose?
LAF is an RBI monetary policy tool introduced in 2000 that allows banks to borrow money through repurchase agreements (repo) or lend to RBI via reverse repo, enabling day-to-day management of liquidity and short-term interest rates.
What is the current policy rate that serves as the benchmark for short-term borrowing cost in India?
The repo rate is the benchmark short-term borrowing cost policy rate.
What is the repo rate and how does it influence liquidity in the banking system?
The repo rate is the interest rate at which RBI lends short-term funds to commercial banks against government securities; a lower repo rate injects more liquidity by making borrowing cheaper, while a higher rate tightens liquidity.
What does RBI do when there is excess liquidity or surplus funds in the banking system?
RBI absorbs excess liquidity through reverse repo or VRRR auctions.
What is the reverse repo rate and what role does it play in liquidity management?
The reverse repo rate is the rate at which banks park their surplus funds with RBI overnight; it acts as the floor of the LAF corridor and helps absorb excess liquidity from the banking system.
Which RBI framework replaced the earlier LAF framework to better align overnight rates with the policy rate?
The Revised Liquidity Management Framework of 2014 replaced earlier LAF.
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